How to manage your money during a financial crisis

We’re pessimistic, losing sleep, and falling prey to stress and anxiety.

As Mental Health Week arrives hot on the heels of dire warnings from the Bank of England over our collective and individual financial futures, there’s no doubt that the cost of living crisis is now hitting us where it really hurts – in the mind.

With basic monthly expenditure rising by more than £300, according to Shawbrook Bank, three-quarters of us are now unsure about the future of the UK economy. Meanwhile, one in five is suffering from insomnia and one in four now cites managing their finances as the biggest driver of stress in their lives.

A quarter of us say the increase in everyday living costs is directly impacting our mental health, warns asset manager BMO – from rent and real terms wage cuts in the face of runaway inflation to national insurance and, of course, energy and fuel prices.

Nor is the financial pressure anywhere close to easing, with further serious energy price hikes due in October, inflation expected to reach 10 per cent around the same time and forecasts of recession as consumers rein in costs and minimise expenditure.

So what are we supposed to do now?

Nail the basics

The relationship between money and our mental state is multi-faceted and highly complex, but there are some key actions that could offer a little relief amongst the murk and panic.

Ask any financial adviser how to deal with the current crisis and they should start by telling you to do three things. The first is to create a household or personal budget, comprising all income and financial commitments. The second is to examine all those figures to see where you can trim and save, or increase your take-home pay to cover costs.

The government-backed financial information service, MoneyHelper, has a decent budget planner.

The third is to create an emergency fund. Ideally, that should be between three and six months’ worth of costs to see you through if disaster strikes but that can quickly become an impossibly large number. Setting aside anything is better than nothing, even if it’s a couple of pounds as soon as they miraculously become available. Always put that cash in a separate account to create some psychological distance.

Know your debt

“It’s important to review and understand the different type of debt that you may have,” suggests Jonathan Watts-Lay, director at workplace financial adviser WEALTH at work.

“For example, you may consider your mortgage to be a form of ‘good debt’. This could be true if you are regularly reviewing your mortgage deal, are meeting the monthly repayments and are comfortable with when your mortgage will be cleared.

“At the opposite end of the spectrum, debt with high interest payments such as payday loans and credit cards can get out of control if they are not repaid quickly.

“For example, if you borrow £2,000 on a 19 per cent APR and only pay the minimum payment every month, it will take you 24 years and 2 months to repay it and you’ll pay back £4,731 in total. The total interest you would have to repay will be a shocking £2,731.

“It should always be a priority to pay off expensive debt first.”

Don’t borrow from tomorrow

Putting it on the never-never, kicking it down the road – there are plenty of ways to describe our tendency to push repayments into the long grass even if it stores up trouble.

Alarming new research from Hargreaves Lansdown, for example, suggests one in four people have either already used Buy Now Pay Later (BNPL) plans to buy essentials, like a winter coat, or would consider it, and almost one in five have or would consider buying groceries with one.

“Borrowing to pay for essentials feels like a solution in the short term, but by spreading the cost, it means pushing up your expenses for months, making it even harder to keep on top of your finances,” says Sarah Coles, senior personal finance analyst for Hargreaves Lansdown.

“To make matters worse, because this lending isn’t regulated yet, if people run into trouble, they don’t have the same protection as regulated borrowing: if you struggle to repay, you’re subjected to whatever approach the company chooses.

“If they treat you harshly, the ombudsman can’t step in and protect you from being hounded or treated unfairly.”

At least the number of people cashing in part or all of their personal pension is dropping, according to online provider PensionBee.

Despite the number of people taking money out staying roughly the same year-on-year, the average quarterly withdrawal amounts declined by more than 10 per cent, from £13,132 in Q1 2021 to £11,676 in Q1 2022.

Fight inflation...

Rising inflation rates aren’t great for debtors as the cost of borrowing increases in line, but they’re not that great for savers right now either. Starting from a painfully low typical rate, even for cash stashed away with limited access, savers just aren’t going to get a return that comes close to matching the rise in the cost of goods and services. This means the money is eroding fast in real terms.

Long-term savers who are prepared to take some risk with their money, should be seriously considering investing if they haven’t already. Long term, equity investments have often exceeded inflation, meaning investors have received a real return on their money. Though the eternal warning about past performance being no guide to future returns remains an important one.

“For people who have investments, the only thing that we do know in uncertain times is that it is important to spread your risk,” adds Watts-Lay. “Having ‘all your eggs in one basket’, such as all your money in property, or a specific company, makes you vulnerable. It is much safer to have a diversified portfolio.”

... and scams

There’s never a good time to be defrauded, but there’s no doubt scammers are cashing in on uncertain times right now.

The Financial Conduct Authority (FCA) is now regularly warning of huge increases in the number of reported possible scams and fraud, including cryptocurrency, pension and, last week, sharing screen scams, which alone, defrauded the UK public out of £25m between January 2021 and March 2022.

The regulator advises all consumers to treat all unexpected communication with caution, even if it includes some basic personal information, to resist being pressured into taking action quickly, and never give out personal details, bank or credit card details without being absolutely sure who they’re dealing with.

When buying a financial product, check the FCA register first – independently and never via the link offered by the seller – to make sure the firm is regulated.

More advice is available from the FCA and Action Fraud, the UK’s national reporting centre for fraud and cybercrime.

Talk about it

We know that acknowledging a financial problem and getting help sounds easy but, for a varied and complicated range of reasons, rarely is.

However, rather than paying a profit-making debt management firm when we can least afford to, charities like StepChange Debt Charity, National Debtline and Citizens Advice all provide a non-judgemental space, excellent money management strategies, and comprehensive advice on further resources and support.