Review your budget after a drop in income
What’s the best way to manage your household budget after losing your job, and what can you do to cope with a loss of earnings? This guide explains how to carry out a budget review and take control of your finances.
- Step 1 – Draw up a budget
- Step 2 – Try to cut back
- Step 3 – Get debts under control
- Step 4 – Boost your income
- Step 5 – Check out benefits and insurances
Step 1 – Draw up a budget
You’ll hear this advice a lot, often from people who have never been in your shoes. And while it sounds dull (or at best, daunting), there’s no doubt that working out where you stand financially is well worth the effort.
A budget is nothing more than a list of all your income and spending. But be honest – fudging the figures or sticking your head in the sand will only lead to nasty surprises later on. Most people underestimate how much they actually spend.
Step 2 – Try to cut back
Comparing deals on mobile phone, broadband, satellite TV and credit cards, as well as energy bills, could save £100s each year.
Work out what you can cut back on to make sure you don’t spend more than your overall household income. This is the part most people find difficult, especially if they have young children. But a good starting point is to divide outgoings into essential and non-essential items.
You can save on essentials like energy bills and groceries without scrimping. Turning the central heating down by one degree can save an average of £55 each year. And can your kids really spot supermarket own-brand baked beans?
Non-essentials, like gym memberships and magazine subscriptions, be ruthless. Think about whether you’re making the most of them (in the case of gym membership, most people don’t after January). If not, cancel them.
Even the small, non-essential items you buy each day can mount up. Newspapers, takeaway coffee, sweets. Put them in order of priority and cut out the least important until you’re within your budget. Alternatively, cut back on all of them so you can still enjoy a little bit of everything without exceeding your budget.
Step 3 – Get debts under control
The interest rate on debts is usually higher than the interest rate on savings. So, if you use any savings to pay off debts, you should be better off in the long run.
Step 4 – Boost your income
Sounds simple. And if it was, everyone would be doing it. Nevertheless, with a bit of effort, there are sources of income you can tap into. For example, did you know that if you have a spare room in your home, the first £7,500 from renting it out would be tax free? Or, if that feels like too big a step, think about selling unwanted possessions, recycling mobile phones and laptops, or getting a job as a party planner or catalogue rep.
Any redundancy pay you have received can help replace your income for a while and help you get by. Similarly, if you have previously built up an emergency fund, this might be the time to draw on it.
Step 5 – Check out benefits and insurances
State benefits are available to help people who are looking for work, or are on a low income. You may also be eligible for tax credits. And if you’ve been paying mortgage payment protection insurance, payment protection insurance, or short-term income protection insurance, now’s the time to claim.
If you’ve had to stop working because of an illness, check for any income protection insurance. You should also check for any critical illness cover, which will generally only pay out in the event of a life-threatening condition.