How to future proof your finances

The number of people seeking debt advice is rising, and many of them are struggling to pay basic household bills such as council tax and utility bills, a debt charity says.

“Demand for debt advice remains very high,” says Joanna Elson, CEO of the Money Advice Trust which runs National Debtline and Business Debtline. “Household debt is 138% as a percentage of disposable income and the nature of debt problems are changing.”

She said debt was often triggered by an unexpected life event – illness, bereavement, divorce, separation, or redundancy.

People are increasingly in debt just in order to pay household bills. Many are struggling to pay lower levels of debt than before and finding it difficult to make ends meet on their current income.

Relationship breakdown and ill health can be contributory factors, and many families are feeling a squeeze on the household budget. “One large bill coming in is enough to push them into financial difficulty,” she said.

In 2017, 46% of clients of National Debtline were struggling to pay debts of between £1,000 and £5,000, compared with just 18% in 2015.

In addition, the nature of debt problems is changing. National Debtline is helping more clients who have problems with arrears with council tax and utility bills. “Ten years ago, one in seven people were struggling to pay these bills – now it is one in four,” she said.

How to build financial resilience

The picture she paints is of many households struggling with even just the basic bills that need to be paid each month. Many more are only just managing.

A recent survey by the Financial Conduct Authority (FCA) in October 2017 found that half of the UK population are already financially vulnerable. Around one in six people would find it hard to cope with a £50 monthly increase in bills.

If interest rates rise or you lose your job, how would you cope? Life can throw up unexpected financial shocks. Here are five ways to build your financial resilience.

1. Reassess your spending habits
2. Switch to cash for a few months
3. Pay down your mortgage and cards
4. Build up your savings
5. Seek expert help

1. Reassess your spending habits

For a few months you might need to cut down on any spending that is not essential. Make a list of what you spend your money on each week. Work out what isn’t necessary.

If you have not shopped around recently for utilities and insurance, then do so – you’ll be surprised how much you can save.

Now read: Why you should switch energy providers and shrink your bill

It’s also worth checking what mobile phone contract you are on, and whether you can reduce the cost. Phones and broadband are some of our biggest regular bills, but if you’ve reached the end of a 24-month phone contract you could switch to a SIM only deal and save yourself between £20 and £50 a month.

You won’t get an upgraded phone, but you could use the money you save to pay off your debt or mortgage more quickly. You can usually keep your own number, and just put the new SIM into your existing phone.

2. Switch to cash for a few months

Here’s a tip that debt counsellors often suggest. If money is getting tight, work out what you can afford after you’ve paid for essential bills, and withdraw your weekly spending total in cash.

It’s a very different feeling handing over cash rather than swiping a card, and it will help you keep to your budget. It also means that the dwindling pile of cash is a physical reminder that you have a limited amount of spending money. It may help you think twice before an impulse purchase or a “bargain”.

You might want to unsubscribe from emails that retailers send you suggesting new clothes or gadgets. Log out of online shopping accounts that enable you to buy with just one click or with an app on your smartphone to reduce the temptation to spend. Anything that makes it more difficult to buy will give you time to assess whether what you are buying is for a “want “ or a “need”.

3. Pay down your mortgage and cards

The Bank of England signalled in June that there might be an interest rate hike in August. That would mean the base rate moving to 0.75%, which could in turn be passed on to mortgage borrowers.

If you have managed to free up a bit of extra cash then it could be possible to overpay your mortgage each month. You’ll need to check first with your mortgage company to make sure you won’t be hit by any early repayment penalties. Also check whether your interest is calculated on a daily or monthly basis, so that you can pick the right time to pay in the extra money.

Reducing your mortgage cost is one of the best ways to shock-proof your finances. It means that you’ll pay off your home loan a bit earlier, and give you some slack if you find yourself struggling to pay in the future, for example if you income is reduced or you lose your job.

With credit cards, think about which is your most expensive debt, and aim to start paying that one off first. You could also consider switching to a card with a zero interest rate period – many now offer 30 or more months interest free. Just may sure you have a plan to pay off the debt at the end of the term.

Now read: How to pay off credit card debt

4. Build up your savings

In the past, banks and building societies have often passed on any increase in the Bank of England base rate to borrowers, but have been slower to pass on benefits to savers.

Money experts suggest that it’s a good idea to have cash equivalent to three month’s worth of household bills saved up in an easily-accessible savings account. That way, if you need a new car or money for house repairs, you won’t be forced to resort to an expensive, short-term loan. It also means that if you were to lose your job or suffer a relationship break-up, you’d be able to cope in the short to medium term.

5. Seek expert help

If you are finding it hard to cope, even if you are not in serious debt, you can go for a chat with a debt counsellor in order to get an overview of how best to manage your money.

Debt charities say coming for help early on can make a solution quicker and easier, although they stress it is never too late to get help and advice to sort out your financial problems.

If you don’t want to make a phone call, or aren’t able to make a face to face consultation, you can still get advice via a webchat with one of the debt charities.

For more information on getting out of debt, read our in-depth debt guide. Or for tips on how to not get into debt in the first place, read our list of personal finance mistakes to avoid.

More information

The Money Advice Service provides money guidance online and over the phone and can be contacted on 0800 138 7777 Monday to Friday 8am-6pm and Saturdays 9am -1pm. Information and guidance is also available on their website or via a webchat.

National Debtline provides free advice to individuals and businesses. It also enables people to discuss their issues via a webchat.

Now read: How to prepare for a higher interest rate on your mortgage

Last updated: 6 December, 2018