Britain is a nation of borrowers with recent surveys suggesting that up to a third of households have savings of less than three months’ salary in the bank. That makes millions of people vulnerable to a sudden financial emergency like a major car breakdown, ill health (which means that the breadwinner has to take time out from work), or even just a burst pipe which causes flooding within the home.
Would you be able to cope with any of these? If you were unable to work for a prolonged period because of an injury or ill health, would you still be able to pay your mortgage, put food on the table and fuel in the car?
Here’s an easy-to-follow guide on how to deal with the unexpected financial emergency:
Take stock of the situation
If something unexpected happens and places a severe strain on your finances, then you should firstly carefully evaluate the new situation. That means not panicking or a hysterical response which will only make the situation worse and create additional anxiety for you and your loved ones.
Before you begin to go about rectifying whatever has gone wrong, you need to have a cool head and to understand exactly how you came to be in this position. That’s simple when it’s something as obvious as the boiler breaking down but perhaps less clear when the emergency is simply running out of money before pay day.
Cut your expenses
It doesn’t matter whether the emergency you’re facing is directly financial, like suddenly discovering that you’ve gone overdrawn, or only indirectly linked to money. Your car may need expensive repairs or your washing machine may have packed up but in both cases, you’ll have to find the money if you want to be able to rectify the situation.
The first practical step to take is to draw up a household budget for the month ahead and prioritise your outgoings. You’ll need to ensure that all the fixed costs – mortgage payments, rent, electricity bill, loan repayments, etc – are prioritised over everything else. The last thing that you want in the midst of a financial emergency is turning a drama into a crisis where you are suddenly in danger of defaulting on a debt or losing your home.
Once you have decided on the main priorities, it’s time to look at other areas where you may be able to cut back. Depending upon the size of the problem, you may have to make significant savings and while this isn’t going to be fun, the positive is that there is never a bad time to look at household expenditure.
Aim to cut back on non-essentials significantly or to cut them out completely. If you’ve got Netflix subscriptions or a gym membership, then ask yourself if you really need these when your car is off the road and you might not be able to get to work? How about your mobile phone? Are you out of contract but still paying a hefty monthly fee when you could simply downgrade to sim-only or pay-as-you-go deal.
What about shopping? Try supermarket own brands or some of the discount stores. Cut out expensive ready meals and buy fresh ingredients and prepare food from scratch because it is considerably cheaper.
Call your creditors
If you can’t claw enough back to cover the financial emergency by making savings on non-essential items, then you should try speaking to the organisations you have borrowed money from. Many will be sympathetic to what are temporary financial difficulties and will probably prefer to offer you some arranged breathing space rather than face the possibility of a late payment or default further down the road. Your creditors might be able to offer you a lower interest rate or even a repayment holiday.
Borrowing a bit more
If you’ve got a credit card with some unused balance on it, you could always pay for the cost of the repair with that. But this option may not be open to people who are already experiencing financial difficulties when disaster strikes.
While nobody wants to get into a spiral of debt repayment problems, there are circumstances where borrowing a bit more can help. If you know that your current problem is only temporary, you could take out a small personal loan with a repayment schedule of a year or less to cover the immediate cost of the financial emergency. There are now many unsecured loan providers who are prepared to consider applications from people with impaired credit records or those who haven’t borrowed before and so don’t have a credit record at all.
If these loans are not open to you, there are guarantor loans where a third party with a good credit record guarantees the repayments.