The cost of living crisis is dominating the headlines right now. With so much conflicting information flying around, it can be difficult to figure out what is the best way to take care of your family’s finances.
Banks, power suppliers, and stores will often try to blind you with large numbers and confusing math terms, often preying on people’s fear of math. However, even if you consider yourself a number phobia, there are some simple steps you can take to use math in your favor and save some money.
The trouble with middle school
For most people, the biggest impact on the cost of living will come from rising gas and electricity costs. This is related to the price limit, which is set by Ofgem. But much of the reports on this limit are somewhat misleading.
Last week, the October high was announced at £ 3,549. But that price is based on an average family. The very nature of an average is that about half of households will use more energy than this and about half will use less.
Therefore, it is very useful to have an idea of how much energy your family actually consumes in a year. If you have lived in the same house for a few years, you can consider your use in previous years as a guide. If you are in a new home, you can make an estimate by taking into account the size of the house, the number of people living in it and other information using an energy consumption calculator.
Your energy bill for each type of fuel is based on two values: a fixed daily rate (SC), which you pay every day regardless of usage, and a cost per unit of energy (CPU). Once you know how many units (u) of that fuel you use per year, you can easily calculate your expected bill for a given year by calculating (365 x SC) + (CPU ux).
Know your percentages
Another major contributor to the cost of living crisis is the soaring inflation rate, which currently stands at 8.8%. In response, the Bank of England has raised the base rate to 1.75%, which has a ripple effect on interest rates on both savings and loans.
The short-term impact of this change depends on whether you have net debt. If you have more money in savings than in loans (including your mortgage, student loans, etc.), then it is possible that rising interest rates give you the opportunity to address some of the impacts of inflation. However, if the opposite is true, and especially if you are coming to the end of a fixed-rate mortgage period, you will most likely be much worse off than you are now.
The simplest way to look at the impact is to look at the interest rates associated with each of your accounts. For a savings account, a 2% interest rate on a balance of £ 100 will leave you with £ 102 at the end of the year. If it is a loan, you will have to pay an extra £ 2. If you have both but your savings account has a lower interest rate, it may be in your best interest to use at least some of those savings to pay off your loan.
However, most loans, including most mortgages, are repayable loans, which means that you borrow a certain amount and then pay it back over a set period, according to a certain formula. The way these loans are structured means that the first payments will see most of your money going towards interest, with the overall balance reduced by only a small amount. For a loan of £ 150,000 at an interest rate of 4% over 25 years, the monthly payment would be £ 791.76 and in the first month, £ 500 of that would be interest.
Therefore, in many cases, if you are in the early stages of a mortgage and have the ability to overpay, you could save a lot more money in the long run. You can use mortgage calculators to see how much of your monthly payment is actually used to pay off your debt.
Divide and conquer
The aisles of large supermarkets can be confusing, with different versions and sizes of the same product available at a wide range of prices designed to confuse you. For example, the soft drinks department of my local store often includes 2 liter, 1.5 liter, 1.25 liter, 1 liter, 600ml and 500ml bottles, as well as 330ml and 150ml cans sold individually and in multiple packs.
While it’s generally true that larger sizes are cheaper (and better for the environment since they use less packaging), this isn’t always the case once you consider specials. A simple tip that will work for any non-perishable product is to calculate the price per unit so that you have a direct comparison.
For example, if a 2 liter (2000ml) bottle of cola costs £ 1.75, that means the cost per 100ml is 175/20 = 8.75p. The equivalent for a 1.25 liter bottle on offer at £ 1 would be 100 / 12.5 = 8 pence per liter, meaning the smaller bottle would have a better value in this case.
In many cases, supermarkets include these costs on the price label to help you. Even when they don’t, it might be worth calculating the unit costs of more expensive products to save a few pounds each week.
Don’t expect the unexpected
It can be tempting to think about the potential riches of winning big in a lottery or going to the casino, but these are surefire ways to lose money on average. This is due to the statistical concept of expected value, the average result you would expect if you could theoretically repeat an activity over and over again.
Suppose I suggested a game where we rolled a dice, and if it was a number from one to five you would have to give me £ 1, but if it was a six you would have £ 2. Clearly that would not seem like a good idea as I would win most of the time, so your “reward” for being lucky isn’t high enough. But how do we know which premium would be high enough? This is where our expected value comes into play.
Think about the first example. All six outcomes of rolling a die are equally likely. In one of the six outcomes your profit is £ 2, but in five of the six outcomes you lose £ 1 (i.e. you have a profit of – £ 1). We can use some simple probabilities to calculate your expected profit from this game:
E (profit) = (- £ 1 * 5/6) + (£ 2 * 1/6) = – £ 1/2 (or -50p).
On average, every time we play, you will lose 50 pence. But using the same equation, if the ‘prize’ for rolling a 6 is increased to £ 5, then E (profit) = 0. On average, you will now be tied for this game. A prize of £ 8 gives E (profit) = 50p, which means that on average you would win 50p every time you play.
We can apply a similar concept to the National Lottery, where the odds of hitting six numbers can be calculated using a slightly more complicated probability. Based on that, the expected value of a £ 2 lottery ticket on 27 August was 95p – if this draw were repeated over and over, you’d have lost more than £ 1 each time. Therefore, the lottery is nothing more than a little fun, except perhaps for the rare exceptions where there is a large rollover prize.
Similar concepts apply to a casino, where the house introduces measures specifically designed to weight the odds in its favor. For example, the presence of 0 on a roulette wheel means that the expected value from a £ 1 bet on a given number is 97.3p – in other words, you lose over 2p per spin on average.
Ultimately, it will be a very busy winter for most of us. The main way the country can overcome this crisis is with wider help. But while we wait to see if that really comes, all we can really do as individuals is make small changes and, of course, help others less fortunate than ourselves.
This article was republished by The Conversation under a Creative Commons license. Read the original article.
Craig Anderson does not work, consult with, own stock or receive funding from any company or organization that could benefit from this article and has disclosed no relevant affiliations beyond their academic tenure.