There are lots of reasons why you might be anticipating a fall in income over the coming months: some may be through choice perhaps you’re having a baby or you’re about to retire or you may be less fortunate perhaps your job is under threat or you are getting less contract work. Whatever the reason, there are things you can do to prepare for the days when you are getting paid less. In general, the more warning you have the better.
Draw up a list of how much you spend each month and where it goes. “It is important to have a really good handle on your budget,” says Martin Bamford of independent financial adviser Informed Choice. “Your expenditure will fall into two categories: the things you need to spend money on and the stuff you choose to spend money on. It’s about knowing the difference between the two and making some tough decisions about what you can cut.”
Some of it might not be difficult. For example, you may have a gym subscription you hardly use. Cancelling it now rather than waiting until your income falls will save you a few quid in the interim. There may also be ways to reduce your necessary spending without pain switching to a cheaper energy provider, for instance, or to a different supermarket.
Patrick Connolly, a certified financial planner at AWD Chase de Vere, says: “In some circumstances a falling income could coincide with reduced costs. For example, if you are no longer having to pay expensive train fares to travel into work.”
Do not wait until your income falls to change your spending habits. As Bamford says: “Give it a test run and you can save the difference and give yourself a bit of a cushion for later.”
If you have expensive debts you may want to try to clear them before your income falls: paying off your credit card or reducing a personal loan will mean you have less draws on your cash later. You may have a mortgage that allows overpayments now in return for some payment holidays later on. If your fall in income will only be temporary, speak to your lender and find out if this is an option. In all cases make sure you are not paying a fee for early repayment.
However, do not rush to pay off debt if you have no savings. “If someone is getting a lump sum, perhaps through redundancy, I would usually suggest they keep it rather than paying off debt,” Bamford says. “If you do not have another job in six or 12 months you might need it for day-to-day spending. It would be harder to take out affordable debt then without an income.”
Depending on when your income is due to fall and what tax band you are in, there may be things you can do to make the most of your higher salary while you still have it. “If somebody’s income will fall then it could be that they can make a pension contribution and gain a higher rate of tax relief before it does,” Connolly says.
However, he cautions: “If your income has fallen it is usually sensible to keep your finances as flexible as possible, in the short term at least. This means you keep your money available until you fully understand the impact your reduced income might have on your standard of living.”
4. Claim on insurance and find out if you are entitled to any benefits
You may be able to make a claim on an insurance policy if you are unable to work at all. If you have any kind of income protection policy or a payment protection policy linked to a loan or mortgage, dig out the paperwork and give your insurer a call. If your job is under threat you will not be able to buy a policy now and make a claim.
In some countries you may be entitled to some benefits once your income has fallen, depending on the reasons why it has dropped. If you are unemployed, you might be entitled to jobseeker’s allowance and other benefits including housing benefit and child tax credits. If you are working but doing fewer hours you may be entitled to tax credits.
5. Restructure your finances
“Consider if your finances can now be constructed more tax efficiently,” Connolly says. “Savings and investments could be held in your name rather than a spouse or partner who now pays more tax, and also look to use tax-efficient wrappers which could also increase your overall income.”
Any regular payments you make into long-term investments may need to be put on hold for a while. “While long-term planning is incredibly important, sometimes shorter term needs just have to take priority,” Connolly says.
Where your reduced income means you will struggle to pay bills or debts, be upfront with the companies concerned. Lenders to whom you owe money may be willing to arrange a repayment plan that reduces how much you need to give them each month for a period. This is a much better option than missing payments and incurring costs, and will be a lot less stressful than receiving calls and letters chasing money. Anyone who doesn’t want to go it alone can get advice from debt charities.
Guardian News and Media 2013