Not struggling with debt? You might be soon

Even if you're comfortable now, your finances could take a hit in the near future...

Last August, The Office for Budget Responsibility (OBR) said that household debt would decrease as a percentage of household income over the next five years. This was reassuring. However, it now says it expects it to increase – a potentially terrible situation for our clients-to-be.

The OBR expects debt as a percentage of household income to rise from 160% in 2011 to 175% in 2015. Put simply, on an average wage of £25,000 per annum the average debt currently stands £40,000. The OBR is saying that by 2015 this debt will be £43,750.

The OBR has also revised its forecast for unemployment in 2011 upwards to 8.2%, which is compounded by its inflation assumption, up 1.1% and 0.6% for 2011 and 2012 respectively.

Unemployment or reduced income is already cited by over 50% of our clients as the reason for finding themselves in financial difficulty. As unemployment figures increase and cost of living is on the rise, more and more households will start to feel the pinch.

This will affect people that haven’t been hit before

Changes in higher tax rate thresholds and the lowering of eligibility for tax credits are likely to spread the pain to middle-earning families, many of which will also be hit by increases in interest rates. They could be battered from all sides!

Our Stats Yearbook has shown that homeowners have higher levels of debt than renters. On average, a client who owns their own home has over £30,000 in unsecured debts on top of their mortgage. A 2% rise in interest rates would lead to an average £307 increase in monthly mortgage payments for clients across the country. Find out more in Rate rises will hit 90% of borrowers.

Families are particularly at risk

Last year, households with dependent children needed an additional £650 a month just to cover everyday living costs compared to those without. The problem gets worse with increasing numbers of children.

Taking all this into consideration, we have compiled a list of five tips which should help you and your family avoid a financial downturn.

1. Prepare a budget

Budgets are the heart of all good money advice – we recommend these in every case. Whether you’re struggling or not, it’s a really good idea to plan your income and expenditure each month to ensure you know where your money needs to be allocated.

Related how-to guide

Set a budget and stick to it

Learn how to successfully squeeze your budget.

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Research from Shelter has found that nearly one third of people spend more each month than they have coming in. This is an average shortfall across the UK of £165 each month. This demonstrates the need to compile and maintain a realistic budget to ensure you can keep on top of things.

2. Don’t rely on credit to live

Many people use credit cards to pay for everyday expenditure. This can only work in your favour if you ensure you can afford to repay it in full every month.

According to Credit Action, around 5 million people in the UK are permanently overdrawn and 18 million have used an overdraft over the last 12 months. A lot of this could be avoided with the use of an effective budget. Overuse of an overdraft is a sign that you're living beyond your means.

Find out how to get rid of your overdraft for good.

3. Weigh up saving against repaying debt

We often shout about how important it is to put money aside for emergencies. Aviva’s Family Finances Report has found that 33% of families have no savings and 40% are currently saving nothing each month. Furthermore, among families that do save, 25% have less than £2,000 put aside, meaning they have little to fall back on in the case of an emergency.

However if you have debts, it’s more important that you weigh up which is more cost effective. Usually it costs more to borrow than you can earn by saving so it’s worth doing the calculations to make sure you’re better off.

Find out more in When saving money costs you £650!

4. Review your expenditure

Most people will only do this if there’s an urgent need. For instance, it’s easy to forfeit a few meals out if you know it means you can comfortably afford a new iPad 2. However it’s vital that you do this on an ongoing basis.

Although the term ‘shop around’ is no longer a novelty, a survey for Credit Action has found that 25.9% of consumers (or 12 million people nationally) have never switched provider for any of the 20 most common financial products. Don’t be part of this statistic and get searching!

5. Look at extra income

Similar to making cutbacks in your expenditure, this is something that people only consider when they need some extra cash.

Even if you’re managing comfortably at the moment, think about how much quicker you could repay your mortgage if you tried. Or could it mean that you can fit in an extra holiday this year? You can find plenty of income maximising inspiration on our blog.

Related how-to guide

Make some extra money

It’s easy to increase your income using these tips.

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One of the key findings from our Stats Yearbook is that it seems likely that many more families, including better-off ones, will be increasingly prone to over-indebtedness in the months ahead.

It’s not a uniform picture across the country: public sector cuts in terms of jobs, spending and benefits will weigh disproportionately on certain groups of people. And as our new Debt View tool shows, the incidence of unmanageable debt bears down harder on specific parts of the country such as London and Yorkshire. We’re not out of the woods just yet.

If you’re having problems managing your debt visit our online counselling service, or contact us.