Unemployment, Savings and Debt
At one time or another, most of us have had to deal with the threat (if not the reality) of unemployment. Losing your main source of income is likely to be a major threat to your financial stability – but there may be various things you can do to prepare for it.
It’s no substitute for a regular, dependable income, but having some savings in the bank can make all the difference if you do end up losing your job. At the same time, carrying debts can make a period of unemployment a lot harder than it might otherwise have been.
To illustrate the kind of issues you could face, let’s take a look at three different imaginary people in three very different situations…
Someone with savings
If someone with substantial savings loses their job, it’s worrying – but it could be worse. With money in the bank, they’ll know they can afford their rent/mortgage and other essential expenses for the foreseeable future. Depending on how much they have saved, and on how quickly they’re able to find a new job, those savings might be enough to tide them over until they can secure a new steady source of income.
It may even mean they can afford to maintain their standard of living in the meantime, although it makes sense to cut back on spending anyway, just in case finding that new job proves more difficult than they thought it would.
To name just one more benefit (and there are many), someone in this situation will be more able to wait for ‘the right job’, rather than feeling they have to take the first opportunity that comes along, even if it’s not what they’re looking for or if it’s poorly paid.
Someone with neither debts nor savings
If someone ends up unemployed and has neither debt nor savings, they won’t have the security of knowing they can afford their immediate needs – but they also won’t be worried about letters coming through the door from their creditors.
Even so, unless there’s something that lessens the financial impact (they can move back in with their parents, for example, or get a redundancy payment, or have valuable property they can sell), that lack of savings could make it a very uncomfortable period in their life.
The difficulties they would face will largely depend on what benefits they qualify for, how quickly they find a new job, whether or not a friend / family member can help them out, etc.
Someone with debts
Someone with substantial unsecured debts faces a real challenge if they’re made unemployed.
On top of all their ‘normal’ living expenses, they’ll have to make payments towards their unsecured debts as well – or contact their lenders and explain why they can’t. Their lenders may well agree to accept reduced payments (or even no payments at all) for a while, until they have a chance to get ‘back on their feet’, but failing to stick to their original repayment agreements can still impact on their credit rating and add to the overall cost of repaying their debts.
The Think Money website has some useful debt guides and information on debt solutions such as debt consolidation and debt management.
Preparing for the worst
If all goes well, it won’t be an issue anyway. Plenty of jobs were secure through the recession and will remain that way now.
Nonetheless, it’s best to ‘prepare for the worst’ even as we ‘hope for the best’. If you have savings, it never hurts to add to them. If you haven’t, remember that financial experts tend to recommend having at least three months’ worth of income put aside for a rainy day.
And if you’re carrying debts, now could be the ideal time to reduce them by as much as possible. To name just two factors (one good and one bad, for the sake of balance)…
The bad news is that the ongoing uncertainty in the country’s economy means many people’s jobs could be under threat even though the actual recession is over.
The good news is that many people are in a good position to work on reducing their debts. It may not help tenants or homeowners with fixed-rate mortgages, but millions of homeowners with variable-rate mortgages are paying far less per month than they ever thought they would, which means they could put more than they expected towards their savings accounts – and/or their unsecured debts – without actually paying more in total than they were back before the base rate dropped to 0.5%.
Useful resources:
- http://jobseekers.direct.gov.uk/
- http://www.direct.gov.uk/en/Employment/index.htm
- http://www.direct.gov.uk/en/MoneyTaxAndBenefits/ManagingDebt/index.htm
- http://www.thinkmoney.com/debt/
- http://www.walthamforest.gov.uk/index/out-of-recession/living-costs.htm