A sudden loss of income can cause havoc with your finances and leave you wondering how you will manage to pay your bills. Instead of just crossing your fingers and hoping that it won’t happen to you (or that luck will see you through if it does), plan ahead with these 7 tips.
Minimise your long-term financial commitments
Some long-term financial commitments are practically unavoidable. If you want to buy a house, for example, then there’s a very high chance that you’ll need a mortgage, which is essentially a long-term loan, even standard rental contracts tend to want a commitment of several months. When you do have a choice, however, then look for ways to minimise the extent to which you sign up to long-term contracts, even relatively low-value ones such as mobile phone contracts or gym contracts. These can really add up.
Keep tabs on your genuine essential expenses versus your optional ones
When you have disposable income, it’s absolutely fine to spend some of it on non-essentials as long as you really enjoy them. If, however, you lose your income, then these non-essentials generally need to be ditched as quickly as possible.
Pay down high-interest debt while you still have an income
Ideally, you should avoid high-interest debt completely if you can and if you do find yourself with it then you should aim to deal with it as quickly as you can. There are two good reasons for this. Firstly it will reduce the amount of money you pay overall and secondly it will reduce the level of your mandatory minimum payment, meaning that you will have less money to find each month if you lose your main income.
Build up a cash cushion
Even if you qualify for benefits, you may have to wait for them to be processed during which time you will still need to live. You might also find that your cash cushion provides a reassuring safety net while you’re learning to budget on your lower income.
Get properly insured
It may be wise to insure yourself against loss of income, even if you are employed. You may also want to look at getting appropriate insurance for anything which really matters to your lifestyle, including pets. While this may add to your monthly expenses at a time when you want to save every penny you can, it can also be a lifesaver in critical situations, literally if it means you can pay a vet’s bill instead of having your pet put to sleep.
Prioritise bills which keep you out of prison, housed and fed over everything else
Let’s be quite clear about this, if you owe money to the government, it needs to be one of your absolute top priorities since failing to pay it can often land you in prison. If you are struggling, it is best to speak to the relevant authority (e.g. HMRC or your local council) and make an arrangement with them than try to come up with a creative scheme to make it disappear or just bury your head in the sand. After that, your priority is anything related to basic necessities such as shelter, food and clothes. Other creditors only get anything once you have secured your basic needs. They are unlikely to be happy about this, but they may be happier if you take a proactive approach and communicate with them so that they know where you are financially and what they can expect to get from you, when.
Be prepared to give up your house
This may be a bitter pill to swallow but from a creditor’s perspective there is no reason for you to own an asset if its sale would pay back (at least some of) what you owe them. If you accept this reality early then you may find yourself in a better position to manage it on your own terms, rather than to have your actions forced by circumstances.