Coping with a reduced income is something that no-one wants to go through, but it's generally assumed that the income stream would have to dry up altogether for the situation to be critical. However, research suggests that even a slight drop could have a disastrous effect on the nation's finances, with a loss of even £100 a month potentially pushing many people in to debt.
The figures, from Citizens Advice's latest financial security study, show that a monthly loss of just £100 would be enough to undermine the stability of household finances, with many people struggling to make ends meet. In fact, 82% of those with an income of between £15,999 and £29,999 said it would be difficult or very difficult to cope with this kind of reduction, while a third said that they'd need to borrow money to make up the shortfall, or would even fall into debt as a result.
Of those, half would borrow money from family or friends, while 45% would be forced to skip or delay payments on essential bills, as their income simply wouldn't go far enough. A further 41% would use an overdraft, while 31% would use a store or credit card, with these latter options having the potential to push people even further into debt.
Reducing spending was another popular approach, with 77% of respondents saying that they'd make cutbacks to absorb the change in their finances, but for those who are already on a tight budget, that may not be as simple as it appears. Even those who would try to increase their income, such as by working more hours, may not feel the immediate benefit, with 43% saying that it would take them months to get back on an even keel, while a quarter think they'd need more than a year.
"Being £100 a month worse off can significantly affect people's financial security," said Gillian Guy, chief executive of Citizens Advice. "For too many people, the only option to cope with a drop in income is to borrow money or go into debt on their essential bills. Childcare responsibilities can mean people are unable to take on any more work to fill the gaps, and where people are able to increase their income it can take up to a year to do so."
The findings come ahead of next week's Autumn Statement and Spending Review, which could mean that the drop in income is a very real possibility: at present, the Government is considering making significant changes to tax credits, which could well result in the £100/month loss for many families. "Ministers need to look carefully at their plans to change tax credits to ensure people aren't driven into debt, have plenty of time to plan their finances and are given help to achieve a financially secure position," said Gillian.
While a drop in income would be difficult for anyone to cope with, with or without the tax credit changes that are proposed, the figures highlight the importance of saving for a rainy day. Additional figures from NS&I show that 45% of Brits don't feel that they have enough money in savings to cope if a financial emergency occurred – a drop in income could definitely be categorised as that – which is why it's so important to have an emergency fund.
It's generally recommended that people should have around three months' worth of income set aside in a dedicated savings account to cushion the blow should the worst happen, and if you've got that kind of money available, a £100 drop in income may not be so difficult to absorb. It'll give you the time to build your income back to its former glory without needing to resort to borrowing, and it'll give you peace of mind in knowing that your finances will remain intact.
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