"Don’t rush into rash decisions": how to survive if your income drops

Taking stock of your finances when faced with a loss of income is better than not knowing your true financial position. Photograph: golero/Getty Images

The economic downturn has hit the finances of many in the UK, leaving them wondering how they’ll get by. Time to turn to the experts for some tips.

By Heidi Scrimgeour

From pay freezes to furloughing and reduced working hours, 2020 changed the financial circumstances of many people, so it’s not a shock to find that more than a third of Brits are worried about their finances as a result of the Covid-19 crisis, according to Aviva.

The pandemic has shown that the future is impossible to predict, but surely that’s all the more reason to prepare for the unexpected when it comes to your money.

Resist kneejerk reactions

Selling your car or leaping into a less-than-ideal job can seem like sensible moves when your financial circumstances change suddenly, but it’s not the time for kneejerk decisions. “Never rush into rash decisions because of loss of income,” says Laura Stewart-Smith, Aviva workplace savings manager, “Instead, take time to think things over before taking any action in relation to your finances.”

Impulsive reactions aside, moving quickly to take stock and regain control of your finances is something Stewart-Smith recommends for anyone faced with loss of income. “Don’t delay in facing the facts — doing so sooner rather than later is likely to be better for your wellbeing, and can actually help you feel better compared with the uncertainty of not knowing your true financial position,” she says.

Build a budget

If your income drops, your first task should be to draw up a revised household budget. Cheryl Sharp, founder of the accountancy firm Pink Pig Financials, recommends analysing bank statements from the past three months to track where your money goes and identify savings you can quickly make.

“Categorise everything into how important the spend is — for example, your mortgage/rent is critical but a take-away coffee is a luxury/nice to have,” she says.

With your budget in place, you can formulate a plan to live within your means and avoid or get out of debt. But don’t start a budget and then forget about it. “Share it with someone you trust for accountability, and then track, review and adjust your budget as your circumstances change,” says Sharp.

Don’t forget to include annual costs. Plan to put money aside each month towards those once-a-year bills, so they don’t come as a surprise.

Pick up the phone

“Talk to your bank and any other financial providers you have relationships with because they may be able to help,” says Stewart-Smith. “Ask what’s available in your circumstances, and whether you can review your package or defer payments. You might have payment protection that can kick in if you lose your job or experience loss of income, but you won’t necessarily know unless you pick up the phone and speak to those experts.”

Don’t ditch insurance

“Check whether you’ve got insurance policies designed to help if the worst happens, such as payment protection insurance, mortgage payment protection insurance or short-term income protection insurance,” says Jay Lee, a mortgage adviser and founder of uAcademy, which provides training for mortgage advisers. “They might be part of a bank-account package or a mortgage add-on product, so you may not even realise you have them.”

It can be tempting to cut costs by ditching insurance policies when your income changes. “Don’t — your home is your castle and you should protect it, so buildings and contents insurance is a must,” Lee says.

Reviewing your home insurance policy, however, does make sense when your finances change. “If you’re worried about unexpected expenses during a period of reduced income, you could invest in add-on packages such as boiler repair or accidental damage and home emergencies policies, which will cover these eventualities.”

lady writing with baby in arm
If your income drops, your first task should be to draw up a revised household budget. Photograph: vorDa/Getty Images

Ponder your pension

If you make fixed monthly payments into a pension, it may be worth switching to a flexible plan if making the payments is too much of a financial stretch. “It’s also worth reviewing your pension, as you may be paying higher annual charges than you would in a different scheme,” Lee says.

While paying lower charges today won’t immediately put money in your pocket, you could end up with a bigger pension pot in the future, making you better off when you retire.

Start a rainy day fund

Having an existing savings pot can help soften the blow when the unexpected impacts your income. Even if you haven’t got that to fall back on, don’t make the mistake of thinking saving is only for when finances are flush. The best time to start saving is now.

“Some people believe they don’t have any spare cash to put away for emergency savings, but this is rarely the case,” says Claire Roach, founder of Money Saving Central.

“Even when your income is reduced, put as much as possible into an emergency fund each month — aim to save three to six months of basic living expenses so you can take control of your finances during times of illness or unexpected loss of income, and continue to meet your financial obligations.”

Consider new income opportunities

A loss of income can hit hard, but it can sometimes yield new opportunities. Lee lost his job in fraud investigation for a UK bank during the first lockdown, but it prompted him to launch his business running online training courses for mortgage advisers, which now turns over £5,000 a month.

“It was an extremely worrying time as not only had I lost my job, but lockdown meant I couldn’t find any other work to keep me going until the situation improved,” he says.

“I set up my business hoping it would cover a few of my bills, but within weeks I was making enough money to keep running my household.”

Above all, remember that support is available when your financial circumstances change. “Take all the practical steps to shore up your finances and make sure your money is working as hard as it possibly can for you. Also, check whether you can apply for any benefits, speak to your tax office to see if you’re eligible for rebates, and look into tax-efficient investments and savings vehicles,” says Stewart-Smith.

“Then remind yourself that the situation is not your fault. Loss of income is very often outside of an individual’s control. But there are many organisations that can help. You’re not alone.”

Find out how to harness your money superpower with tips, tricks, and information on managing money in today’s ever-changing world. Read more here.

The views expressed in this article do not constitute financial advice. The value of investments may go down as well as up and you may not get back the amount you invested.

This article was originally published on theguardian.com as part of the Aviva and Guardian Labs 'Be a money hero' campaign.

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