The UK experienced the deepest recession since records began earlier this year because of Covid-19 and the resulting lockdown. This has led to a lot of job insecurity, low interest rates which are impacting savings, and it’s become more difficult to get credit as banks and lenders are tightening their lending criteria.

It’s understandable to be concerned, but the good news is that it’s possible to improve your ability to weather further disruption with careful planning and budgeting. Focusing on your financial security now is the best way to deal with any money-wobbles that may be waiting for us in the coming months.

However, protecting your financial future isn’t as daunting as it might seem. We’ve broken it down for you into the key areas that need some attention right now.

Get on top of budgeting

We all have our money-missions in life. For some, owning property is the primary goal, for others, it’s increasing day-to-day living standards, but we all need to work on growing our savings over time, separate from our living costs or spending money.

To save, you first need to know how much money you have to put away each month. To do this you’ll need to understand where your money is going right now. Look at your past expenditure and separate your spending into the following categories. If you want to make this simple, the Bippit iOS app can do this for you.

1. Bills & Essentials
2. ‘Fun money’ - discretionary spending that’s used for leisure, clothing, holidays etc
3. Savings

Once you know where your money is going, you can create a manageable budget, and one of the ways to think about it is to follow the 50/30/20 rule:

• 50% of your earnings on essential outgoings, rent, and bills,
• 30% on discretionary spending (our wants rather than our needs),
• 20% set aside for saving. Move money at the start of the month to a separate account so that you aren’t tempted to dip into it.

Using these ratios can be tricky in tough times, where incomes might not be as secure, or when living in a big city where rents are high, so you may need to tweak the numbers to suit your circumstances. For example, if there’s no way for you to avoid spending 60% of your budget on essentials, then you could work with a 20% spend on discretionary spending and 20% going to savings.

A tip to create more capacity is to speak to your bill providers and do comparison checks to make sure you’re on the best plans for your essential outgoings.

Also keep an eye out for areas where you can reduce your spending by cancelling any unused subscriptions - do you really need everything that you’re signed up for? Are there any outgoings that would cause you financial distress if your income were to drop? Anything where you’re locked in for a set period of time or contractually obliged to pay for the full term might need to be addressed, as you can often flip to a different plan or subscription which allows you more flexibility to cancel should the need arise.

As times are tough you may notice that you are emotionally spending more often, which is understandable, however this could be leading to more instability in the future. By budgeting carefully with the framework above, you’ll be able to identify patterns in your spending, particularly around times of stress and make more informed decisions.

Build an emergency fund

A good rule of thumb is to have at least three months’ expenditure in the bank in case of a job loss or an unexpected cost. Having a buffer is critical for tough times, especially ones that are outside of your control.

Whilst it may be tricky to build your savings during tough times, it’s not impossible. Even having a small amount of savings is better than nothing, so here are some saving tactics to get started or speed things up:

• Have a separate savings account which doesn’t have a debit card; You won’t be able to dip into it easily.
• Create a standing order or direct debit which moves money automatically when you get paid.
• Set a goal. Give yourself achievable targets and ‘gamify’ the saving experience. Once you reach your target, create a new goal!
• Use the best saving accounts. Look into ISA’s and investment accounts which give you the best interest rates. Just remember, the money should be easily accessible, so be wary of long drawdown periods.    

Manage your debts

The average household debt (not including mortgages) is now £14,540 in the UK, which may  rise due to the knock-on effects of COVID-19. Job losses and a slow economy are certainly making things complicated.

It may seem obvious, but we should always try to pay off our highest interest debts first, and if you have debts across different credit cards and loans, consider consolidating them into one single personal loan for a fixed term as this may have a lower combined interest rate.

Don’t forget about making over-repayments where possible. Paying the minimum amount on your debts can mean you pay hundreds (sometimes thousands) more than you need to over time. For example, if you have a credit card with a £5,000 balance (interest rate 18.9%), a regular £200 monthly payment would take about 3 years to pay this off costing £1,410 in interest (i.e. nearly 30% of the total). If you were able to increase your monthly payment to £460 the debt would be paid off in a year saving £880 in interest.

Of course, increasing your monthly repayment may not be an option, but if possible accelerating them can lead to big savings.

Review your investments

If you’re already investing, then it’s worth checking if there are notice periods to withdraw the money. You might need to take the money at short notice, but not every saving or investment account allows you to do this (sometimes there is a penalty attached). If you do have to request a redemption of your money and wait a while before you can get your hands on it, you shouldn’t class this as an emergency fund.

You may also need to clarify the terms of your savings and investment accounts to see what happens if you have a drop in income. Is there a minimum that needs to be paid every month? What’s the notice period (if you want to stop saving)? Are there any early exit fees? Give yourself a clear view of what will happen if you need to reduce the amount you are saving or investing.

You could also consider reducing your pension contributions if available to you - but make sure you understand the consequences that lowering any investment payments may have on your overall financial and life plan.

Consider protection

Protecting your income doesn’t always need to come from having a cash saving buffer. You can also get covered for income loss via an insurance plan. It’s particularly useful (and a good idea) if you have a mortgage, are raising a family, or don’t have an emergency fund. Should anything go wrong and you lose your job you can use your insurance to help cover the essential costs so that you are not left in a difficult situation.

Income protection usually covers 60-65% of you P60 income for:

• Accidents: injuries that mean you can’t return to work
• Unemployment: if you are made redundant, not if you leave your job
• Sickness: if you get diagnosed with an illness that means you cannot work

Some providers have a deferred payment system, which means you have to wait before they pay out the premium, and longer deferred periods are often cheaper, but you need to factor in when your emergency funds or other savings will run out, to cover the waiting period.

It’s good to note that any money you receive from an income protection plan will be tax free. Although receiving 65% of your income might seem like a sharp drop, without the tax being deducted, it likely won’t be far off your usual paycheck.

Life insurance can also be crucial if you have a family or loved ones that would struggle to stay afloat if your income was to disappear. If you should fall ill (or worse) you’ll have the peace of mind to know that your family won’t be saddled with a mortgage or other debts that they would find hard to clear. In some policies, your children’s education will also be looked after, as well as their home.

Like income protection insurance, life insurance payouts are tax free, however, when they are added to the rest of your assets, they may be subject to inheritance tax.

However, taking on the extra costs of an insurance policy at the moment may not be possible,  so it’s important to look into any workplace benefits you might not be claiming. Many companies offer their employees various in-work insurance policies, healthcare and other plans that will make it more affordable for you.

Know your tax situation

Do you know if you’re using all the tax allowances available to you? For instance, are you using a tax-efficient savings account, or claiming the Marriage Allowance? Many people take advantage of an ISA, and try to put as much of their savings in there as they can. There are four different types of ISA’s:

• Cash ISA
  This is a simple and straightforward savings account with a maximum contribution of £20k each year. There are different types of Cash ISA’s including fixed-rate, instant access and regular savers, and they all have various benefits, so it’s worth doing a little investigating to find the best one for you.
• Stocks and Shares ISA
  These have the same maximum contribution, but let you invest your money in a fund (which is a selection of shares or bonds from different companies). These ISA’s are usually managed by a company which will charge you a monthly fee to make investments. You may also be charged on any transfers you make to withdraw or transfer money. There’s no tax to pay on any profits, interest earned from bonds, or dividend income inside the ISA, but it does come with an element of risk - investments can go down, as well as up!
• Innovative Finance ISA
  This includes Peer-to-peer lending, lending to businesses, and crowdfunding. This is a type of investing, and may come with even higher risks.
• Lifetime ISA (also known as a LISA)
  The government introduced the LISA in recent years to get people planning more long term with their money. You can only save up to £4000 per year in this type of ISA which needs to go towards your first home or your retirement, but the government will give you a bonus top-up of 25%. If you were to open an account at 18 and saved the full £4k a year, you’d receive a total of £33,000 bonus by the time you are 50.

Our advisors are ready and waiting to chat to you about  ISA’s - so send them a message in the Advisor Mail area to get started.

Check your entitlement

It’s also worth checking if you’re entitled to receive any state benefits. With any change in circumstances, you might be able to access new support, or supplement your earnings by claiming Universal Credit. You can check your eligibility here, and find out what you might be able to claim. How much you receive is dependent on many different factors, including if and how many dependent children you have, if you are disabled, and of course how much you’re earning.

If you have a family, remember to update your Child Benefit entitlement, and if you and your partner now earn less than £50,000 per year you can claim full Child Benefit rates.  

Seek out support

A simple way to get started is to try the Bippit Healthcheck, which takes just a couple of minutes, and gives you a clear idea of what needs the most attention, and you can even send the results over to your dedicated advisor to have a more in-depth discussion.  

As you can see, there are many ways to get yourself prepared for what the future may hold, without necessarily needing to increase your earnings. If you want to know more about anything we’ve mentioned above, remember you can get in touch with your advisor on Bippit and ask them about what you’ve read. They’ll be able to give you guidance about your financial position and goals, while you use the rest of the platform to set your budget and track your spending.