How to manage on a reduced income.

Household budget

WEALTH at work provides ideas on how to manage your finances should you find yourself facing a reduced income through redundancy or a change in your salary.

There have been many recent redundancy announcements and even with the new job support scheme, it sadly seems inevitable that more will be announced over the coming months.

Of those who have a job, many are learning to cope with a reduction in salary (pay-cuts) as a result of reduced work. Many don’t have sufficient savings to fall back on with a recent study by Lane Clark & Peacock finding that almost a third of employees (32%) have less than one month’s savings.

Money worries have led to many feeling greater levels of anxiety with concerns that unexpected expenses could tip them over into financial crisis. Learning how to budget and manage debt on a reduced income is crucial during these uncertain times.

WEALTH at work, a specialist provider of financial education and guidance in the workplace, has outlined some ideas on how to manage your finances should you find yourself facing a reduced income through redundancy or a change in your salary.

1. What will your new income actually be? – If you or a member of your household has been made redundant, or had to take a pay-cut, it is crucial to know what your new income will actually be and budget accordingly. Firstly, work out what available savings and assets you have such as: pensions, savings, ISAs, property and investments, and what expenses and liabilities you have e.g. mortgage, debt, childcare, insurance and utility bills. Then look at any other household income including any salary or your redundancy. If the amount of money you need each month is more than the amount you have coming in, you can then work out what action you need to take to cover your costs. The Money Advice Service has a great budget planner: wmoneyadviceservice.org.uk/en/tools/budget-planner.

2. Review all your outgoings – Individuals should check their bank statements and make a list of what they are spending each month. This will highlight where your money is going and where savings could be made. By getting your finances in order, it may be possible to free up money to pay off any debt or to live off. Now is a good time to cancel any subscriptions or memberships you have forgotten to cancel. If you can’t afford them, now is the time to get rid of them.

3. What can you do if you are struggling to pay your mortgage or rent? – Speak to your mortgage lender or landlord to find out what your options are. There are some government schemes available, and it may be possible to take a mortgage holiday but the deadline for applications is 31 Oct 2020.

4. How to manage overdrafts and debt payments – When it comes to overdrafts, credit cards and other debt, lenders are required to provide support to those struggling which will vary depending on your circumstances. If you are struggling to make repayments, it may be possible to defer them or receive an interest free overdraft, usually up to £500. Importantly, speak to your providers before any payments are missed. If you can afford to do so, it’s always worth paying off expensive debts and those with higher interest rates first. There are many different types of debt with varying rates of interest.  Credit cards and overdrafts can have rates of 18-40%, with payday loans having rates of 1,500% and more!

For example, a debt of £3,000 with a rate of 18% APR, could take 10 years and 10 months to pay off if paying £50 a month, with a total interest paid of £3,495. If that monthly payment was increased to £100 a month, the debt would be paid off in three years and four months, and interest paid would be only £908. If this was increased to £300 a month, the debt would be paid in 10 months with total interest paid of £252.

5. Should you continue to pay into your pension? – If you are in financial difficulty but still in work, it may be tempting to try and save money by reducing or pausing your pension contributions. However, plan carefully before doing this because if you can afford to continue making regular investments during a market downturn, more positive long-term returns may be generated.

6. Think about where and how you shop – By switching brands it might be possible for you to significantly reduce the price of your regular shop. In addition, by planning for your weekly shop in advance, it may help you to search for deals and reduce expenditure on non-essential items. Discount vouchers are often available through voucher and discount websites, and some people have access to discount vouchers through their employer. This could be crucial if you have to make a big purchase, such as if your washing machine or vacuum cleaner breaks.

7. Check if you are paying too much for your utilities and broadband – It is possible to save a lot of money by shopping around for cheaper utilities and broadband providers. There are many comparison services out there to help you make the switch. For example, by shopping around 50% of people could achieve a saving of £338 on their dual fuel energy cost according to comparethemarket.com May 2020 data.

8. Staying in is the new going out but a lot cheaper! – It is surprising the amount of money which is usually spent by households on nights out, day trips, holidays and experiences. Now that many of these are not an option, there is a lot of money which can be saved.

9. Can you afford to retire? – Those planning to retire or who find themselves facing an unplanned early retirement are most probably feeling really concerned if they can afford to do so right now. However, this may be more achievable than they think. They may not realise that they could use the tax free cash from their pension to pay off any outstanding loans and mortgages, and without these debts they may not need as much as they think to afford retirement. For example, someone earning £30,000, once they have paid their income tax (£3,020), national insurance (£2,460), pension contributions (£2,400), mortgage (£6,000) and loans (£2,400), may end up with a disposable income of around £13,720 p.a. Realising that you may only need a retirement income of less than half your salary to maintain your standard of living can be an eye opener and make retirement a more affordable and realistic option.

10. How can you make the most of any redundancy pay? – Redundancy pay can form a major part of your income if you lose your job. It can be used to pay any of your usual household bills and living expenses, to clear debts, or can be paid into your pension or invested in other ways. However, what’s right for you will depend on your individual circumstances and it may be beneficial to seek guidance or regulated financial advice to work out what’s best for you.

It’s important to know that up to £30,000 of redundancy pay is tax free but any non-cash benefits that form part of your redundancy package, such as a company car or computer, will be given a cash value and added to your redundancy pay for tax purposes. For example, if you are nearing retirement, you can reduce the overall tax impact on redundancy payments above the £30,000 tax free limit by using some of your redundancy pay to directly boost your pension savings.

Jonathan Watts-Lay, Director, WEALTH at work, comments; “Many people are feeling greater levels of anxiety at the moment, as they try to make ends meet or realise that their income may be at risk. Help is available, whether it be mortgage holidays or deferred debt repayment, so make sure you find out what support is available to you. With some careful planning, there are many ways to cut back on your outgoings, and these savings may prove crucial to managing the weekly and monthly budget. It is crucial to speak to your service providers and lenders before any payments are missed.”

He adds; “And of course, those approaching retirement are going to feel the impact of this to the greatest extent. This could be a daunting prospect but depending on their circumstances, affording retirement could be more achievable than people think.

Financial education, guidance and regulated financial advice is really important right now as it can help people to understand how to manage their money when household incomes are under severe strain and when facing redundancy and retirement. Some workplaces offer this to their staff so it’s always worth asking what’s available.”

The latest news is brought to you by WEALTH at work*, a specialist provider of financial education and guidance in the workplace.

*WEALTH at work and my wealth are trading names of Wealth at Work Limited which is a member of the Wealth at Work group of companies.