By Marcus Leach

Families in the UK are struggling to build up their savings as the impact of inflation puts pressure on incomes and debt levels, according to research from the latest Aviva Family Finances Report.

This report also highlights financial taboos and the ways in which families prioritise other spending against their protection needs.

Typical incomes increase over the past year:

The typical monthly net income for families in the UK is now £2,066, an increase of 7% in the last year (January 2011 - £1,937). However, not all family groups have seen an increase in their year-on-year monthly incomes and divorced/separated/widowed parents saw their monthly income fall significantly by 22% over this period from £1,387 (January 2011) to £1,075 (January 2012).

The most common source for families’ income remains the salary from a primary earner (69% - January 2012). However, this has fallen steadily over the past six months from a high of 72% in August 2011 to 70% in November 2011, suggesting that unemployment among families is on the increase.

Typical amount held in debt increases by 48% in the past year:

However, while the average family income has risen over the year, debts have also been on the increase. The typical family debt - excluding mortgages - has increased by 48% from £5,360 (January 2011) to £7,944 (January 2012) — 32% of the typical annual net household income (£24,792 — January 2012). This shows that families are building on their existing debts rather than clearing them.

Number of families saving nothing each month increases:

Families are saving slightly less each month than they were at this time last year. The typical amount saved on a monthly basis has fallen slightly from £22 (January 2011) to £21 (January 2012) — having peaked at £34 in August (2011). Furthermore, 42% of families are now saving nothing on a monthly basis (January 2012) compared to 40% in January 2011.

However, the number of families with no savings set aside has fallen from 33% (January 2011) to 30% (January 2012), suggesting that most families are trying to build up some sort of cushion against unforeseen expenses. However, six out of 10 families are still without any form of protection insurance, which suggests that many are not fully prepared against the unexpected (see separate news release).

Families adjust to inflation:

Despite the impact of inflation over the past year, the average monthly family expenditure has remained steady over the past 12 months. Housing remains the single largest monthly expense for UK families at 20% of their typical monthly income (January 2012), followed by food (10%) and debt repayment (9%). The percentage of monthly income spent on food has stayed at a consistent level over the past year (10% - January 2011), indicating that although inflation on this item has increased (4.88%), families are planning their food shopping and searching out value brands.

This trend of economising has also seen families cutting back on their non-essential spending. A fifth (22%) of families (January 2012) claim they are not spending money on personal goods, while 30% say that they do not spend on entertainment/recreation/holidays, and 42% spend nothing on leisure goods.

The rising cost of living:

Over the next six months UK families are primarily concerned about the rising cost of living (62% January 2012), the threat of redundancy (46%), and meeting the cost of unexpected expenses (41%). One in ten (10%) is worried by the prospect of continued unemployment, meaning that those who have been out of work for a while are becoming less confident about their prospects of re-entering the workplace.

This might also indicate that people are still very concerned by the economic situation, and do not believe that recovery or growth will come into play in the immediate future.

These same concerns also remain the most significant fears over the next five years, with the rising cost of living a concern for 61% of families (January 2012), followed by the threat of redundancy (51%) and unexpected expenses (39%).

“Families in the UK are still very concerned by the rising cost of living and levels of unemployment," Louise Colley, head of protection sales and marketing, Aviva said.

"While average incomes have increased over the past year, the prices of essential goods and services have also increased, meaning that families are struggling to keep up.

"Many appear to have acclimatised to this economic environment by shopping around and seeking to minimise their spending in certain areas. However, at the same time there are still a worrying number of families with insufficient savings or large debts.

“Although many families are trying to build a savings cushion, this report clearly demonstrates that they also need to consider a protection buffer — protecting themselves against those unexpected financial shocks such as having a serious illness or worse still, a death.

"The impact of not having protection in place can be devastating at what is already a hugely difficult time. Around half of families say they are planning to get their finances in order in 2012, so for their peace of mind, we’d strongly urge them to put protection at the top of their list.”

Join us on
Follow @freshbusiness