The recent Coronavirus pandemic has left us all feeling financially vulnerable, no matter what our situation. This article aims to provide some practical support with how to deal with a financial emergency. We take you through recommended steps if you find yourself in financial difficulty. We also examine what you should do about falling investment values during a financial emergency.

You can also find specific guidance on help for the employed, self-employed and businesses.

Key topics covered in this article

Play the first video below to listen to Dan Woodruff appearing on BBC Radio Essex where he discusses with Ian Wyatt the financial difficulties that have been brought on my the coronavirus, and ways to deal with them. The second video below features Dan Woodruff appearing on ITV Anglia discussing Coronavirus and the effect on pensions.

What is a financial emergency?

A financial emergency is any situation that puts you under significant financial strain. The current Coronavirus pandemic is obviously an event that it putting us all under significant financial strain. Many people will lose their income during this period, so hopefully some of the points raised below will help you to put together a practical response.

Examples of a financial emergency

Give each of the situations below some thought. How would you prepare for the financial strain that this might put you under?

• A shock to the financial system
  From time to time there are occasional serious, even global financial shocks. The current Coronavirus is one such global event. This has caused most Governments to significantly restrict usual economic activity. The result has been uncertainty for employees, the self-employed, and business owners.
• Investment downturns
  If you have money invested, perhaps in the stock market or property, then you should expect occasional, temporary downturns in value. How you react in such situations will have a major impact on your long-term plans.
• Losing your job
  Even in normal economic periods, you may lose your income if your employer runs into financial difficulty, or no longer needs your role. What would you do if your employed income suddenly ceases?
• Serious illness
  If you are too ill to be able to work, then you are likely to lose your source of income. Your employer may pay you some sick pay initially, but what will you do when this inevitably stops?
• Death of a partner
  Apart from the personal tragedy of the loss of a partner, you will probably suffer some short-term, and possibly long-term financial strain as a result. How would you, or your family cope in this situation?
• Other emergency situations
  There can be many examples of short-term financial emergencies. How would you cope financially if any happen to you?
  • Your car breaks down
  • Your home needs unexpected repairs
  • You get an unplanned tax bill
  • You get stranded abroad while on holiday

How savings help with a financial emergency

Probably the best way to see yourself through a financial emergency is to have appropriate levels of savings. If you have money available in cash, you can use this to pay for the unexpected expenses associated with the financial emergency. There will inevitably be a point where your savings become exhausted. The right amount of savings is a complex balance between short-term access to money should you need it, and longer-term growth.

• No savings
  The biggest problem comes from not having enough savings to cope with an emergency. If you are in this situation, you will need to take drastic action with your spending (see below). Not having savings means that if you suddenly need access to cash you will either need to spend less, access longer-term savings, or borrow money. None of these solutions are ideal, but may become necessary.
• Too much savings
  Clearly , having savings will help you to continue as usual throughout the financial emergency. There is a danger to having too much in savings, as this money tends to grow very slowly. However, having more savings than you need is obviously better than not having enough.
• Not enough savings
  If you do not have enough savings then you will find yourself running out sooner rather than later. You may find that you have to take difficult decisions whether to adjust your spending, access longer-term accounts, or borrow.

What level of savings is ideal?

Obviously, if you are dealing with a financial crisis now, then the right level of savings is not top of your mind. However, hopefully you will see the back of this crisis and you can later build up cash to help you to deal with the next financial emergency.

An emergency fund

An emergency fund should have at least 3-6 months variable expenses in an instant access account. Take a look at your budget, and establish what is guaranteed income, and which income might be lost in a financial emergency. For example, guaranteed income might be from a fixed pension like the State pension, or a pension annuity. Non-guaranteed income might be from employment, self-employment, or investments. If you know what your typical spending is for a month or a year then you can deduct any income that you know is guaranteed. Anything that is left over is at risk should a financial disaster strike you.

Example:

John spends £2,000 per month on average. He also receives £700 per month from the state pension, and £1,300 per month from his work. John’s emergency fund should be built around 3-6 times his variable spending that is not covered by his guaranteed income. Therefore, the minimum should be £3,900 to £7,800.

If John had been made redundant as a result of the Coronavirus then he could use this emergency fund to pay for his usual expenses for 3-6 months while he looks for new work.

Planned expenditure

Add to your emergency fund any additional planned lump sum spending. For example:

• Tax bills
• Holidays
• New car
• Home improvements

If John had committed to work on his house costing £10,000, then he should have put this aside before beginning the work.

Taking variable income from investments

If you are taking variable income from long-term investments such as pensions, you could find that this income drops if the investment values fall. If you instead continue to withdraw from the investments at the usual rate this may severely reduce your investment capital while the values have fallen. As a general rule of thumb we tend to advise our clients to set aside up to 2 years’ variable income where they are taking income from investments that change value. This allows them time to continue with the planned withdrawals even when markets fall (which they should expect every 5-7 years). A typical market downturn might last 1-2 years. The plan would be to restore the cash balance once capital values improve. Of course, no financial crisis is standard, so even this fund can be depleted. However, it is a necessary practical compromise between short-term income being available, and long-term capital growth for your investments.

If John’s income comes partly from his personal pension plan, which is invested, then he would be glad to have 2 years’ variable income set aside. He could continue to withdraw from his pension knowing that he does not have to take dramatic action in the short term.

Changes to your budget in a financial emergency

If you find yourself in financial difficulty the first thing you should do is assess your budget.

Take a sheet of paper, or put this in a spreadsheet. List all of your income, and all of your expenses. Your income may have stopped, or you may have different sources of income that continue even through the crisis.

Once you have this data, you can clearly see if there is a surplus of income over expenses, or more likely a deficit (you are spending more than you are bringing in).

What is the deficit of spending after allowing for expected income?

How much savings are available?

If you have emergency savings then now might be the time to start to access these savings. In our example above, John’s emergency fund might permit him breathing space of 3-6 months without having to adjust his lifestyle in any way.

If you have savings, how long will they last if you make no further changes to your budget?

Will the emergency reduce spending?

Bizarrely, some emergencies decrease your spending even while your income ceases. For example, during the Coronavirus pandemic governments are locking down usual society. During this time, you may find that you are unable to spend money in the usual ways. Yes, you will continue to spend money on food and essentials. However, you are unlikely to spend money on discretionary items like eating out.

You may be able to adjust your budget for lower discretionary spending while the crisis lasts.

Cutting back on non-essential spending

If your budget is in deficit then you may need to take further action.

There are certain items of spending that will need to continue such as food, housing, utilities etc.

There are other spending items that can be ceased, such as gym membership, clubs, subscriptions, cleaners etc.

Look at your normal monthly spending and work out what you can do to cut back, possibly temporarily.

Drastic measures

If you still find that your spending is in deficit, even after cutting back on non-essential items, the some drastic measures might be needed:

• More income
  One solution could be to generate additional income elsewhere. You may find that your employment has stopped, but there might be other opportunities. For example, during the Coronavirus crisis many sectors have stopped employment (pubs, restaurants, gyms etc). However, other sectors need more people, such as delivery companies and supermarkets. If you are nimble, you might be able to top up your income from elsewhere.
• State support
  Governments are doing what they can to support the employed, self-employed, and business during the Coronavirus crisis. You may be entitled to some support, so see below for more details. Of course, if your income has ceased, you should be entitled to apply for state benefits to help you to cope.
• Debt holidays
  Many loan providers will be supportive during a financial emergency, as the alternative might be for you to default on the loan. If you have any credit you should speak to your product provider to see if you can take a temporary payment holiday. This could apply to mortgage, loans, and credit cards, depending on the bank. The debt holiday might start at 3 months, and could help you to put off making payments during this period. Bear in mind that the debt and the payments will still apply, so any deferred payments will be added to the debt, either extending the term, or increasing the payments once the deferral period is over. You should also check that your credit rating is not affected. It is important not to just cancel your direct debit – speak to your provider first, or your credit rating will be affected.
• Speak to suppliers
  You should discuss your situation with any significant suppliers you have. For example, if you are renting you may get some understanding from your landlord, and no evictions can take place without 3 months’ notice. Larger companies and counciles are used to dealing with people who are in financial difficulty, so they may be in a position to offer a payment break, or to reduce services for a short period. In addition, HMRC is being understanding at present, so you may be able to put off tax bills. If any planned flights are cancelled you are entitled to a refund, not just vouchers against future flights. Many hotel companies are offering extensions to their standard cancellation terms.
• Accessing longer-term savings
  You may have money available in longer-term savings like pensions or shares ISAs. It could be tempting to access this money, but of course doing this could impact your future plans. Effectively, spending the money now means that it might not be available later. Added to that, the crisis might have reduced asset values, meaning short-term withdrawals take an even bigger slice of the available money. If you have fixed rate bank accounts, many providers will allow you to access these savings without penalties during the Coronavirus crisis.
• Debt
  You may be tempted to put your deficit spending on a credit card or overdraft. This can only be a very short-term measure, and could lead to a terrible spiral of debt that lasts for years after the initial financial emergency is over. Avoid expensive short-term debt like credit cards and overdrafts if at all possible. During the Coronavirus crisis banks are being encouraged to provide interest-free overdrafts where requested, up to £500. 0% credit card deals are still on offer, but these may become restricted.
• Family loans
  If might be possible to borrow money from a family member to see you through the financial emergency. If that person has access to savings, this could be a much better option than expensive credit.

Work out how you might meet the budget deficit using a combination of these measures.

Other support

• MOT tests
  The government has announced an extension to all tests due after 30th March, provided your vehicle remains roadworthy.
• Insurance
  If you are out of work due to illness related to the crisis, then income protection cover is likely to protect your income, after the initial deferred period. Critical illness cover is unlikely to pay out.

Investments in a financial emergency

If you have money invested in pensions, ISAs, or other accounts, you are probably concerned about falling values. This section deals with how we generally approach longer-term investments in a crisis.

Coronavirus – government support for the financial emergency

The UK government has announced a variety of financial measures designed to keep the economy moving while measures are in place to control the spread of the pandemic.

For further reading, The Chartered Institute of Securities & Investments (CISI) have created some informative guides which are aimed at anyone employed, self-employed or owners of a business.

Click the links below to read the guides in full.

Employed: https://t.co/rM5hLJ3BqA

Self-employed or business owners: https://t.co/3bRAhqBlTU