Whilst wage growth may have reached an 11-year high in the UK in June, households are still struggling to cope with inflation and the rising cost of living. The situation could worsen in the event of a no-deal Brexit, with the impact of tariffs likely to send the price of some commodities soaring.
This can prove challenging enough without a sudden or unexpected drop in income, which may occur as a result of an accident, illness or redundancy from your position of employment.
Either way, an unforeseen drop in income can have a significant impact on households and families regardless of their circumstances. In this post, we’ll look at how you can deal with this whilst also taking proactive steps to mitigate the risk in the future.
Coping with a Sudden Drop in Income – How to Proceed When it Isn’t Your Fault
In most cases, unexpected drops in income are caused by instances outside of your control, otherwise you’d be in a position to anticipate them and act accordingly. The most common factors are illness or job loss, which often come out of the blue and dramatically reduce your income in the short-term.
In both of these instances, you may benefit from mortgage payment protection insurance (MPPI), which provides coverage in the event of unexpected income loss and covers the cost of your mortgage period for a defined period of time.
Similarly, short-term income protection (STIP) has been designed to help ill or injured people who are unable to work for a fixed period, usually between six months and a year. This usually pays out a percentage of your monthly salary, enabling you to cover most of your essential living costs.
If you’ve been ill and suffered as a result of a late diagnosis or problems encountered during surgery, you may also be able to file a medical negligence claim.
This could prove crucial, as it may provide you with recognition of wrongdoing and financial compensation that may help you to cope with a period of lost earnings.
The Proactive Approach – How to Prepare for a Drop in Earnings
Ideally, you should also prepare for unexpected events or drops in income by accumulating savings over time, particularly during periods where your earnings are at their optimal level.
As a general rule you should strive to commit at least 10% of your earnings to savings, whilst retaining between three and six months’ salary is also recommended where possible. Even if such goals exist outside of your means, however, try to save as much as possible and watch as this amount accumulates!
If your go through a separation for divorce and see your household income affected by this, you may also want to review your change in circumstances and see if you’re eligible for benefits or tax credits.
In the case of a separation, you may become eligible for working or child tax credit, whilst you may also benefit from reduced council tax in some instances.
Ultimately, the key is to be prepared and informed at all times, whilst taking both proactive and reactive measures to safeguard your financial security.