3 practical ways a weak pound can affect your money

If you were asked to reel off as many iconic British things as possible, the pound wouldn’t be a surprising addition to your list.

Like the almighty dollar, the British pound holds a place of pride in the hearts of many Brits, a symbol of British financial strength as a currency that is often featured among the most valuable.

So, it may have been worrying to see the pound rapidly devalued in recent weeks as the government’s new mini-Budget announcement resulted in a large-scale sale of government bonds, as well as a reduction in the value of the pound against the dollar to its lowest rate in more than 50 years.

The Guardian reports that the pound hit a low point against the dollar of ÂŁ1.0327, which was lowest rate seen since 1971.

But what does a weak pound mean for your money?

The knock-on effects can hit your finances in a variety of ways including travel plans, purchasing foreign goods, and investing decisions.

Read on to discover exactly what a weak pound means and ways you can protect your finances and ensure you maintain your momentum towards your long-term aspirations.

  1. The cost of goods and services are likely to rise as the cost of imports increases

As the pound is devalued, it becomes more expensive for companies within the UK to import raw materials, services, and products that are priced in foreign currencies.

As imports become more expensive, the cost is often passed onto British consumers through rising prices for goods and services, which is one of the driving measurements for the rate of inflation.

The latest figures from the Office for National Statistics (ONS) put annual inflation at 9.9% (as of 13 October 2022).

More expensive imports could hit UK consumers in a variety of ways such as groceries (the UK imports 50% of its food), technology (US products such as Apple or Google gadgets), transportation (foreign cars), and energy bills (foreign gas).

One of your first thoughts might be to buy British in response. However, many British firms use imported products within their manufacturing processes, or as ingredients, and are still likely to be affected by increases in the cost of imports.

A potentially sound strategy might be to start by reassessing your monthly household or business budget and factoring in whether you can make any short-term cuts. You could then seek to protect your money against the eroding effects of inflation on their “real” value.

This can be achieved in a variety of ways from assessing the best savings rates available or seeking to move your surplus funds into growth generating investments. But before you make any big decisions, it can be constructive to consult a financial planner.

Working with a planner can help make sure you have the right plan in place for your personal circumstances, to tackle any short-term instability, and keep you on track to meet your long-term goals.

  1. Travel could become more expensive as your money is devalued against foreign currencies

As the value of the pound against foreign currencies continues to decline, the ability of your money to stretch across your holiday plans will shrink. Currency market movements can drastically scale back holidaymakers’ spending plans.

It can affect the cost of your flights, travel taxes, accommodation, and your daily outgoings such as meals, activities, and holiday purchases.

Suddenly those funds you set aside for a week in Orlando with your partner and the kids might not stretch as far and you’re having to reconsider your arrangements.

A trip to the US in particular looks especially tricky at the moment with the pound having fallen by more than 20% against the dollar this year.

It is important to compare foreign exchange rates before making any holiday decisions and to review rates from different providers. While high street banks are a safe and reliable option, they might not offer the best deal and can charge expensive fees.

One option could be to examine specialist credit or debit card options with your bank that offer no fees for spending or withdrawing cash overseas.

They often have better exchange rates than you’d get through a bureau de change and will definitely be more beneficial than exchanging your cash last minute at the airport where you might end up paying up to 30% more for your money.

Finally, travel is one area where perhaps considering to “go British” might be beneficial, as choosing to travel within the country will largely negate any ramifications from a weak pound on your travel funds.

  1. UK investments may benefit from a weak pound, but foreign investments might be trickier

It might feel like a decline in the value of the pound would be bad news for UK markets, but this isn’t necessarily the case.

A large portion of the major “blue chip” British companies that make up the key UK stock market indexes are global businesses, that are based in the UK.

For large British firms that have incomes that rely heavily on international business, a falling sterling can be beneficial as their overseas revenues will be able to buy more pounds when they are exchanged back into sterling.

It is also beneficial for UK businesses that rely heavily on exporting their goods overseas, as British goods become more attractive to foreign buyers.

It should also be noted that many companies based in the UK still declare their dividends in dollars, which can provide investors with added protection during volatile periods for the pound.

Conversely, it’s probably not a good time to diversify your portfolio by investing your weakened pound in overseas, particularly US, stocks. However, the dollar’s relative strength has helped mask losses on the US markets by British investors as the currency effect softens the blow.

If you’re unsure of the best way to protect your money in the face of market instability, high inflation, and a declining pound, you should contact a financial planner for expert advice.

Get in touch

The ebb and flow of currency valuations can have all kinds of unexpected effects on the value of your money. It is important to receive advice before making any major decisions that could affect your financial outlook.

To start a conversation about the best course of action for your specific needs, please contact us at mail@delaunaywealth.com or call us on 0345 505 3500.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.