Today is the day our finances hit rock bottom

It hasn’t been the best of weeks so far.  

Blue Monday – once little more than a marketing gimmick – has come and gone. But today is when the real low point arrives, at least where our financial affairs are concerned.

Studies suggest that today is the day that Britons are most likely to be preoccupied with their finances as they run low on money after the Christmas overspend and the five-week gap between paydays makes its presence felt.

Debt collection company Lowell has found that half of UK households are already expecting to be worse off financially due to coronavirus – together with the fact that 93 per cent of the UK had their pay date in December brought forward. Overall, that could mean two-fifths of UK households will be struggling financially right around now.

Research from credit card provider Vanquis suggests almost a quarter of us felt under pressure to spend more money than we’d like to over Christmas 2020, overspending by £211 on average. Almost one in three have already maxed out all of their credit and customers of controversial “buy now pay later” borrowing will also begin to see charges hit their accounts following December spending.

By this point in the new year, half of us are likely to be relying on some form of borrowing, rising to seven in ten of those who already have outstanding debts, the research suggests.

It all means that more than half have made a financial resolution for the year ahead. Among 18- to 35-year-olds most likely to be hard hit by the fall out of Covid, almost 80 per cent have plans to cut costs and boost savings, even after a year in which our financial buffer apparently soared.  

“In Q4 2019, prior to the pandemic, UK households were saving a mere 7.7p for every £1 of disposable income,” notes Jason Hollands, managing director of investment firm Bestinvest.

“Since the start of the 21st century, the savings ratio has bounced around in a range of 6-9.5 per cent. In Q2 last year, during the first lockdown the UK household savings ratio rocketed to an incredible 27.4 per cent – the highest on record – and it was 16.9 per cent in Q3 as well.”  

They might need it. The economy shrank by 2.6 per cent in the month to November as the second national lockdown curbed activity.  

“Even though the fall in November’s GDP was less than expected, nevertheless, it presaged a double-dip recession,” warns Ruth Lea, economic adviser to the Arbuthnot Banking Group.

“In a very general sense recession can be defined as ‘a period of temporary economic decline’, irrespective of the number of quarters involved, implying not just falling output but a deteriorating labour market.  

“Given the expected weakening labour market … the next few months will not only see recession, but feel like one.  

“Interestingly both the chancellor and the Bank [of England] governor issued warnings last week. The chancellor said the economy ‘would get worse before it gets better’, whilst the governor warned the UK economy was facing its ‘darkest hour’ due to lockdown.”  

This week, a separate study by Aegon has found almost a third of consumers expect their financial wellbeing to worsen over the course of 2021 and 84 per cent of adults are now concerned about the future of the economy as a whole.  

The demand for debt advice is expected to increase by up to 60 per cent by the end of 2021 and around three million more people than before the pandemic will need support with problem debt by the end of the year, according to government predictions.  

"Suffering from financial difficulties places a huge amount of stress on people’s mental health and wellbeing, which is why we are committed to giving more people who are struggling with debt a chance for a fresh start,” said business secretary Kwasi Kwarteng, after the government announced new plans to support those facing problem debt.  

The proposals are set to increase the financial eligibility criteria for debt relief orders (DROs), widely considered an alternative to bankruptcy for those with few assets or disposable income who owe less than £20,000.  

Those with such an order don’t have to make payments towards most types of debt and creditors can’t force them to pay off those debts. Usually lasting a year unless things get better, the debts are written off when the DRO ends.  

In a bid to give more people access to this option, eligibility could be increased to cover total debts of £30,000, available to those with assets of up to £2,000 and surplus income of £100 a month.

"Lower income households with few assets are among those most deeply affected by debt during the pandemic,” Phil Andrew, CEO of StepChange Debt Charity, said.  

“Extending eligibility for debt relief orders will help to give more people a chance to avoid the long-term misery of being trapped by debt that they cannot afford to repay over a reasonable period."