It looks like budgeting and spending wisely will become more and more important throughout the rest of 2022. Several UK businesses are already preparing for a likely recession. For example, used car retailer Cazoo cut its workforce by 15% in preparation for tougher economic times. Asos and Boohoo also saw share prices drop dramatically after a surge in product returns. This shows that even online retailers are not immune from the coming downturn.
Most companies are rightly predicting customers will start to change their spending habits throughout the year. The change is due to drastically increased inflation and living costs. The Consumer Price Index is now 9.4% higher than it was 12 months ago. What this means is that on average, everything you spend costs 9.4% more than it did 12 months earlier. This was the largest increase ever seen in the National Statistic series, which began in 1997. It is estimated that the last time the increase was higher was in 1982.
There were sharp rises in particular sectors. For example, the price of transport rose by 15.2%, caused by a 42.3% rise in motor fuel. Food and non-alcoholic drink rose by 9.8%. Gas prices rose by 28.1% and electricity by 18.8%, which was the highest increase since 2009.
With these vital products and services rising sharply, you may have to start looking at your monthly expenses to see how you can save money. This article will show you how to streamline and prioritise your spending habits
Create a list and categorise your spending
The first thing to do is create a list of all the things you can envisage spending money on and separate them into spending categories. Then think about what categories you can create to group your different expenses into. For example, categories could include:
- Rent or mortgage payments
- Utility bills such as gas and electric
- Food and drink
- Transport (eg bus tickets, petrol)
- Debt payments
- Gym membership
- Subscription services
- Personal care
- Leisure activities
Identify which spending categories are most important
After this, you should identify which of these living expenses are absolutely necessary. The living expenses that you need to pay for above all else to meet your basic needs. As defined by NASA, there are some absolute basic needs for human survival. These are:
This leaves us with the three most important payments to focus on; food, water, and shelter. You should categorise these as the most important. This means that if money is tight, make sure you have enough food, have paid rent, and have paid any water bills above all else.
You could also use the Maslow Hierarchy of Needs to help categorise monthly payments by importance. This pyramid structure also recognises physiological needs like food, water and shelter as the most important, with a further tier (safety and security) after completing the basic needs. Above that are your psychological needs, including belongingness, self-esteem, and love. This is when your categorisation becomes more tricky. It may seem wise to cut costs by closing any memberships to sports clubs, entertainment clubs, or gyms. However, if that activity gives you a sense of belonging, makes you more confident and helps you build and maintain loving relationships, it may be worth holding on to.
At the top of the pyramid is self-actualisation. This revolves around striving towards and achieving goals and aspirations. For example, paying for an education course could help you achieve your career goals. Or, paying for a strength and conditioning coach could help you progress in sports. Self-actualisation is the last most important category/expense on the pyramid. However, for people in poor financial health, sacrifices have to be made. You may have to put your career aspirations on the back burner until you have taken care of your physiological and psychological needs, for example.
Tally up your essential living expenses and measure them against your household income
When you have organised your spending categories by priority, it is time to start financial planning. First, you should write down how much income you have each month. Then you should write down a figure of how much you will spend in each category. Add up all the categories to give you a total and subtract that from your after-tax income. If there is money left over, you already have a sound financial plan. If you stick to your budget, you will have money left over for treating yourself, building savings, or making an extra repayment of debt.
If your budget shows that you do not have enough income to cover your outgoings, you will need to make financial decisions to trim expenses. You should go down the list to make sure your basic essentials are covered. Then after that, you should see at what point it runs out. Hopefully, the money runs out at the luxury item stage, allowing you to trim off the non-essentials.
What expenses can I trim from my budget?
There are a number of ways to trim the fat off your budget. For example, many families could save a great deal of money if they cooked and ate meals more in the house. Take-away meals and restaurant bills can quickly add up. You could also cancel any subscription streaming service or at least cut back if you have more than one subscription. You could also cancel any paid TV packages and instead opt for regular Freeview TV. Or, you could cancel any extra packages you do not use, such as sports or movie bundles.
You could also shop around for better deals on many of your bills. For example, you may be able to get a better mobile phone deal, a better car insurance rate, or a cheaper internet package. Also, if you need to make any essential purchases of products such as furniture, you can save money by buying second-hand. Another efficient method of saving money is to cut back on your energy use. Make sure all your electrics are turned off and have shorter showers, for example.
You should also think about how you can eliminate any temptations to spend money. For example, you should unsubscribe from marketing emails and un-follow brands and social media influencers on social media. This way, you will be less tempted to spend money on unnecessary materialistic items. Also, if you pay monthly to use a bank account that provides no useful benefits, you could switch to a free bank account. It is also wise to track your spending each month to look back on and see where you could have saved money and where your budget failed. Using a spending tracker app is a good way to do this.
What to do when you are struggling financially
Sometimes all the financial planning in the world won’t help your situation. For example, if you have lost your job or have a lot of high-interest debt, you may not even be able to cover the essentials. Hopefully, in this case, when times were more prosperous you have saved money as an emergency fund. Hopefully, this emergency fund could give you a brief period of relief until you get back on your feet. It is also why it is important to build savings when you are able to.
In the UK, there are numerous ways you can get help paying gas and electric bills. For example, if your council tax band is from A – D you can get a £150 rebate from your council tax so you can pay your energy bills. Also, starting in October, the government will give every household £400 towards their energy bills as part of the Energy Bills Support Scheme. If you are on a low income and eligible, the Department for Work and Pensions will send you a letter this year informing you of a £140 discount on your energy bills. This is known as the Warm Home Discount Scheme.
If you have a prepayment metre and cannot afford to top it up, you can apply for a voucher from your local council. If you were born before 26 September 1955, you will get a Winter Fuel Payment. Also, if you are on benefits, you will get a Cold Weather Payment every time the temperature drops below zero degrees for seven consecutive days.
Also, energy companies also have their own grants you can apply for.
If you cannot pay your rent, it is advised that you contact your landlord as soon as possible to see if they will allow you to pay at a later date. Or, they may allow you to repay a missed month over future payments. If you have lost your job or are on a low income, you may be able to claim housing benefits under Universal Credit. If this is not enough to cover rent, you may be able to claim a Discretionary Housing Payment from your local council.
If you can no longer afford a mortgage, there are a number of actions you can take. Firstly, you can negotiate with the lender to see if you can cut repayment costs by paying over a longer period. Or you could try and get them to reduce the interest you have to pay on the mortgage. If you have an endowment mortgage, you can reduce or stop endowment payments. You could also try and switch to a more affordable mortgage provider.
If you have mortgage payment protection insurance, your insurer may be able to cover mortgage payments for you if you are sick or unemployed.
Unsecured debt like missed credit card payments can sneak up on you. However, there are actions you can take to get your finances back on track. If you are above the age of 55 and have a defined contribution pension, you can take money from this. This could also be used to pay off mortgage debt. This way, you are still using your pension to contribute to your future. The first 25% can be taken out as a tax-free lump sum.
Before reaching out for expert advice on debt, you may be able to first negotiate a debt repayment plan with creditors. If you need time to sort out your debt repayments, you may qualify for breathing space. This is a 60-day time-out from debt repayments which is known as The Debt Respite Scheme. If things have become too hard to deal with, and you have entered into mental health crisis treatment, you also have a breathing space period. For the entirety of your treatment and for 30 days after, you will not be asked to repay debt.
You may also be able to consolidate all debt, such as credit card balances, into one monthly payment. You can set up a debt management plan with an external specialised company to organise this for you. However, they often do not include priority debts and can negatively affect your credit rating. You could also use an insolvency practitioner to set up an individual voluntary arrangement. This also allows you to consolidate your debt into singular monthly repayments. The insolvency practitioner will add their fees to the repayments.
You can apply for a Debt Relief Order if you cannot afford to repay your debt. This means for 12 months, your creditors cannot recover the debt without a court’s permission. After 12 months, the debt is usually dropped. To be eligible for a DRO, you must:
- Owe less than £30,000
- Have less than £75 a month in spare income
- Have less than £2,000 worth of assets
- Not own a vehicle worth £2,000 or more
- Not have applied for a DRO within the last six years
If you have a DRO, you cannot borrow more than £500 without telling a lender. You cannot be the director of a company, and you cannot create or manage a business without a court’s permission. The DRO may be cancelled if your finances improve.
As a final option, you can apply for bankruptcy, where your assets will be seized and sold to repay any outstanding debt. After 12 months, most of your outstanding debt will be written off.