Coping With Financial Crisis

With unemployment at a six-year high, we show you how to make ends meet when you're down on your luck.

Last week, I wrote How To Master Disaster in an attempt to explain how to deflect the slings and arrows of outrageous fortune, including the financial problems caused by death, serious illness, unemployment, accident and so on.

The following day, I had an email from Fool reader Frank P, who warned me how difficult it is to claim means-tested benefits and survive on Jobseeker's Allowance. Thus, the following five tips are for Frank and anyone else who finds themselves in challenging financial circumstances.

Indeed, given that unemployment has hit a six-year high of 1.7 million (including 950,000 people claiming unemployment benefits), now is a good time to consider how you'd get by without a regular income from work.

Tip 1: Check which benefits you can claim

There are dozens, perhaps hundreds, of state benefits available to people who find themselves in straightened circumstances, including Carer's Allowance, Council Tax Benefit, Disability Living Allowance, Housing Benefit (for tenants only), Income Support, Jobseeker's Allowance, Maternity Allowance, blah, blah, blah.

Of course, negotiating the state-benefits system is about as easy as wading neck-deep in treacle. For example, many of the above benefits are means tested, which means that you may not be able to claim if you have savings, a working partner or a part-time job. To find out which benefits you are entitled to, visit the free, independent EntitledTo website today.

Tip 2: Stretch out your savings

If you have savings, perhaps an emergency fund that you've built up or a redundancy payment from your previous employer, it's vital to make this money last. Place it in a savings account with the highest interest rate that you can find, such as the easy-access ICICI Bank HiSAVE account (5.15% AER) or the instant-access Citibank Flexible Saver account (5.03% AER) with cashcard. Also, don't be tempted to dip into your savings too often, as they may have to last many months or even years!

Tip 3: Learn to budget

Without an income coming in every month, you are forced to live much more frugally, which means tightening your belt and learning to become a master budgeter. These articles will help: How I Lived On 10p A Day and How To Budget, as will our ever-popular Living Below Your Means discussion board.

Tip 4: Check your insurance policies

If your financial worries have been brought on by an accident, sickness or job loss, you need to find out whether you have any insurance policies to protect against these unforeseen events. Ask your employer about its policy on sickness pay and find out whether it provide employees with income protection (long-term sickness insurance).

Also, check the credit agreements and statements for your credit cards, personal loans, mortgage and other debts and regular outgoings to see if you're paying (or have paid) premiums for payment protection insurance.

Look for mentions of personal loan protection (PLP), mortgage payment protection insurance (MPPI) and credit card repayment protection (CCRP), which may be known by such names as Creditcare, Loancare, Paymentcare, etc. If you do find that you're covered by this insurance, call your lender or insurer for a claim form without delay -- and make sure that you follow its claims procedure to the letter, or your claim will be delayed or rejected!

Tip 5: Learn to live with little luxuries

If you're suddenly out of work or laid up sick, you'll soon discover that you have a lot of free time on your hands and, in the words of the old saying, "the Devil finds work for idle hands to do". So, try to resist the temptation to cheer yourself up by spending money on your vices, sins and treats, because this may make your position much worse in the long run.

The trick is to fill your time with productive work (such as looking for a new job or improving your physical health), whilst still enjoying cheap fun and small treats. For example, instead of going to an expensive private gym, take a bike ride or go for a swim in your nearest council-run pool. Instead of buying a newspaper, read the online edition; join your local library instead of buying the latest bestsellers; replace a night out with a meal in, etc.

The trick is to replace expensive activities with equally enjoyable but far cheaper pastimes, so you don't feel too deprived of mental or physical stimulation. That's easier said than done, but this approach will improve your chances of keeping on the financial straight and narrow.

Finally, for more advice on coping with your finances in adversity, read What If You Lost Your Job Tomorrow?, When Santa Gives You The Sack and What To Do When You Lose Your Job.

Here's wishing you all a speedy return to financial health!

More: Use the Fool to find great savings accounts, insurance and 0% credit cards!