It might feel like the cost-of-living crisis has had us in its grip forever, but in fact it’s been two years since inflation began the upward trajectory that has seen our incomes squeezed and our saving ability squashed.
Since then, we have become accustomed to paying far more for everything from food to fuel, while our mortgage and rental payments have increased too, thanks to the Bank of England’s decisions to raise interest rates in an attempt to curb inflation.
All of this has influenced our longer-term financial planning.
Data from the Bank of England shows that we’ve been depleting our savings pots at the fastest rate since records began.1
We withdrew a collective £4.6 billion from banks and building societies during May of this year, raiding the money we’ve built up for a rainy day to pay the bills.
Consumers have also cut back on insurance, according to the UK regulator, the Financial Conduct Authority (FCA). The organisation’s study shows that 8% of UK adults have cancelled one or more policies since May 2022, with pet, gadget, mobile phone, and extended warranty insurance being the main casualties.
By depleting our savings cushions and cancelling insurances, we may have become less financially resilient than we were before the cost-of-living crisis began.
Here’s how to check how your financial resilience, or ability to withstand financial shocks, is faring, and what to do if you are concerned about yours.
Understand the concept
There are many different definitions of what makes one financially resilient. The Government’s Office of National Statistics defines it as a household being able to cover an unexpected fall in household income for a three-month period.2 A recent study looked at being able to cover a 25% or 75% drop in income for that period.
Other studies have looked at households’ debt-to-income ratio- the amount they owe against what they earn, or the amount of household income that is being saved (this can be a negative figure if a household is spending down savings.) https://sticerd.lse.ac.uk/dps/case/cp/casepaper219.pdf
Perhaps the most holistic measure of financial resilience comes from Canada, where the Seymour Financial Resilience index considers everything from your savings buffer to the social network you can call upon in a financial crisis.3
All these facets of your finances should be considered when thinking about whether your family is financially resilient.
Consider scenarios
Checking your financial resilience involves some uncomfortable imagining. According to debt charity Step Change, the most significant life events that push people into financial hardship include unemployment or redundancy, reduced income or benefits, health issues or injury and separation or divorce.4
Consider how your household would fare under each of these events, and whether you have the resources to counter them. These resources may include an emergency savings buffer or an insurance policy such as life insurance or critical illness cover.
Take steps to improve resilience
- Put in a buffer
A savings buffer, or cushion, can help get you through the early days of any difficult life event. Government website Moneyhelper suggests having at least three months of outgoings in an easy access savings account as a starting point, so if you do not have this, it’s a good place to start.5
- Consider protection
If you’re still paying a mortgage, are self-employed, or have a family who depend on you financially, taking out life insurance or critical illness cover could give you peace of mind. It’s a difficult decision to make though, and everyone’s situation is different, so it’s worth speaking to a financial adviser before buying policies.
- Pay down debt
Even if you can pay the minimum payment on any credit card debts or loans, these outstanding debts will still affect your resilience as you will struggle to service them if the unexpected hits. Planning to pay them off, prioritising the most expensive debt first, will help you to improve your financial fitness. Even a small amount extra each month will add up.
- Improve your credit record
If the unexpected did happen, the ability to get a low rate or zero per cent credit card could help with expenses or with paying down debt. However, only those with good credit records can apply for these. You can check your credit record for free with ratings agencies including Experian or Clearscore. Simple behaviours like joining the electoral roll will help increase your rating, as will ensuring you don’t miss payments on credit cards. If there are mistakes on your record you can write to the rating agencies to ask for them to be corrected.
- Look to the long term
Even if your finances are in good shape for now, you’ll still need to plan to ensure you remain resilient in the long-term, especially into retirement. This may include the need to invest or top up a pension, so that you’re able to enjoy your later life. Speaking to a financial adviser can help you to put a plan in place that works for you and your family.
This article does not constitute financial advice.
Friday 13 October
1 https://www.bankofengland.co.uk/statistics/money-and-credit/2023/may-2023
2 https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/articles/financialresilienceofhouseholdstheextenttowhichfinancialassetscancoveranincomeshock/2020-04-02
3 https://financialhealthindex.org/seymour-financial-resilience-index/
4 Page 4 https://www.stepchange.org/Portals/0/assets/pdf/StepChange-Statistics-Yearbook-2022.pdf
5 https://www.moneyhelper.org.uk/en/savings/types-of-savings/emergency-savings-how-much-is-enough#:~:text=A%20good%20rule%20of%20thumb,you%20three%20months%20breathing%20space.