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The biggest financial challenges of 2023

Detail of a woman counting money for payment. finances
2022 took a toll on our finances, but what does 2023 have in store? Photo: Getty

The past year has taken a toll on our finances, and while the worst of the squeeze is over, we’ll still be feeling the pain well into 2023.

The newest edition of the Hargreaves Lansdown (HL) Savings & Resilience Barometer found that relentlessly rising inflation left millions of people running on empty by the end of 2022, and that there’s still a long way to go.

For those on lower incomes, young people and singletons, it could do enormous damage to their financial resilience ⁠— both today and for the long term too.

The Barometer is a piece of analysis HL does in partnership with Oxford Economics every six months, bringing together 16 separate measures from official datasets, and using statistical modelling to build picture of people’s overall financial resilience. It can help us to see where we stand right now, and what the next year holds in store.

Read more: Money new year resolutions: How to plan your finances for 2023

The results bring one piece of good news: we may be past the worst of the squeeze.

The number of people struggling with rising prices hit almost two in five at the end of 2022, and this is expected to gradually fall back to just under a quarter by the end of this year.

Unfortunately, the damage has been done, as many have spent savings and built debts. Our financial resilience has dropped substantially in the past six months, and unwound three-fifths of the boost we got during the pandemic from things like lockdown savings.

LONDON, UNITED KINGDOM - NOVEMBER 08: A shopper in a supermarket in London, Britain, on November 08, 2022 as new research revealed that food price rises with inflation to a record high of nearly 15 per cent. According to Kantar, the price of groceries, food and drinks has spiked and is set to continue rising as the cost of living crisis continues. Kantar found that more than a quarter of households are struggling financially - twice as many as this time last year. (Photo by Dinendra Haria/Anadolu Agency via Getty Images)
Those on lower incomes have been hit hardest, because they spend a larger chunk of their earnings on the essentials. Photo: Dinendra Haria/Anadolu Agency via Getty

But the pressure hasn’t been felt equally. Those on lower incomes have been hit hardest, because they spend a larger chunk of their earnings on the essentials ⁠— and the price of these has risen at double the rate of non-essentials.

Overall, just under a third (30%) of households will take a hit to their finances because of rising prices, but among lower earners this rises to almost 80%.

To make matters worse, they’re far less likely to have any costs left to cut, and they’re less likely to be sitting on any extra savings built up during the pandemic. When we got to the end of 2022, households with less income than average were actually in a worse savings position than before the pandemic hit. For those with no savings left, it then raises the risk that this year will see more people on lower incomes taking on unaffordable levels of debt.

Read more: Money: What to expect in 2023

But while lower earners bear the brunt, those on middle incomes are starting to feel the squeeze too, and almost a third have poor resilience levels. Changes in the property market will also hit homeowners in this group. Those who need to remortgage this year face doing so at significantly higher interest rates, which is going to wreak havoc on both savings and debt.

Lower house prices will also take a toll, although the severity will depend on just how far and fast prices fall.

It won’t just affect people’s confidence and immediate financial position, it will also damage their longer-term plans, and the scores for being on track for a moderate retirement income will fall far more for homeowners than for renters.

This drop is particularly striking among Gen Z and Millennial homeowners, who tend to have borrowed more to buy when house prices were higher, so will be more affected.

Those who need to remortgage this year face doing so at significantly higher interest rates, which is going to wreak havoc on both savings and debt. Photo: Getty
Those who need to remortgage this year face doing so at significantly higher interest rates, which is going to wreak havoc on both savings and debt. Photo: Getty

There were also much lower resilience scores for single people ⁠— both with and without children ⁠— who are having to make a single income stretch further. Only 13% of single person households without children have very good financial resilience compared to 41% of couples with no children.

Some of the detail in the barometer also shows that people who make financial decisions with their partner tend to be more resilient than those who make decisions alone, so having a sounding board seem to help people find solutions during tougher times.

Millions of us have had a difficult 2022, and are set for a thorny 2023, but it seems that we stand a better chance of getting through it in one piece if we can do it together.

Watch: How to prevent getting into debt