More than half a million people every year face the prospect of being made redundant, and for the vast majority this would mean being plunged into a financial crisis. According to research by Birmingham Midshires, a staggering 73 per cent of the population couldn't support their families if they suddenly lost their jobs. And with households already coming under increasing strain due to rising food and petrol costs, as well as increasing mortgage repayments, it is feared that a full-scale economic downturn may force more employers to cut their workforces.
So what can you do? How can you prepare for such a scenario and what financial products are available to help you sleep soundly at night? Save & Spend has consulted the experts to draw up a six-point guide to safeguarding your finances.
Step 1: Build up a savings buffer
This is the most important task. Having some emergency money set aside will ease the pressure should you end up losing your job because it buys you valuable breathing space in which to find alternative sources of income.
Geoff Penrice, a financial adviser at Bates Investment Services, advises having the equivalent of three months salary to use in an emergency. This means that a short-term problem won't become a long-term crisis.
"With increasing unemployment and redundancies likely, we all need to protect ourselves should the axe fall," he says. "With increasing prices, utility bills and mortgage rates, families are under a lot of pressure so a contingency fund is key."
Tim Hague, the head of savings and investments at Birmingham Midshires, recommends that people have a balanced portfolio of savings products which can meet their needs at different times.
"It's the fridge-freezer scenario – being able to help yourself to something quickly is just as important as having something for the longer term," he explains. "No matter what your circumstances, a financial buffer helps you cope with the unexpected."
Step 2: Switch to a more flexible mortgage
The biggest outgoing in the average family's monthly budget will be the mortgage – but the good news is there are plenty of products available to help ease the financial burden, according to Richard Morea, technical manager at broker London & Country.
"If you think you are going to lose your job then you could switch from a repayment mortgage to one that's interest only," he says. "Most lenders will allow this to happen even though they may charge you a fee."
So how would the figures work out? Well, if you had a £150,000 repayment mortgage on an interest rate of 6.25 per cent and 20 years left to run, you would be paying £1,096-a-month, according to L&C's figures. Switching to interest only would reduce that to just £781-a-month – a saving of more than £300.
You could also consider extending the period of repayment – as long as your age and circumstances allow. For example, if your mortgage was due to end in 15 years you could stretch it to 20, which will reduce the monthly repayments.
Opting for a flexible mortgage that allows you to make overpayments when you're flush and take payment holidays when money is tight may be a good idea, but just make sure the interest rate is competitive.
There are also offset mortgages enabling you to keep your savings in a pot alongside your mortgage to "offset" the loan while the money is in their account. For example, if you have a mortgage of £160,000 and savings of £30,000, you will only pay interest on £130,000. The flipside is that your savings don't earn any interest.
Whatever your scenario it's essential to be honest about your situation, says Penrice. "If you do lose your job and are struggling with mortgage payments or any other bills, it is important that you tell your lender straight away," he says. "It's in everybody's interest for people to be able to ride the storm and lenders are keen to help people in trouble if they co-operate."
Step 3: Insure yourself
You can insure yourself against virtually anything these days – and if it's redundancy you're worried about, you need to think about taking out an accident, sickness and unemployment policy, says Matt Morris, policy adviser for broker LifeSearch.
"If someone is concerned about losing their job they can take out unemployment cover," he says. "However, the policy will usually only run for 12 months and you must not have any prior information that redundancy is on the cards."
These policies will replace all or most of your salary if you're unable to work due to redundancy, accident or illness. In most cases they kick in a month after your income dries up and continue for a set time. The idea is to provide short-term help in the case of unexpected changes in your circumstances rather than a long-term solution.
Alternatively, you could consider a more simple (and cheaper) policy such as payment protection insurance, which will cover your mortgage or loan repayments should you be unable to work. Beware, however, that many of these policies don't start paying out until a year after you stop work, and it's crucial to shop around, as some providers charge unnecessarily high rates for these simple products. If you're in any doubt about which option is best for you, seek advice from a financial adviser or specialist such as LifeSearch.
Step 4: Make existing assets work for you
As well as putting as much spare money away as possible in various accounts, you should also make sure your existing savings products are working hard, suggests Andy Gadd, head of investments at Lighthouse Group.
"The best way of maximising your cash is reducing exposure to areas in which you are either paying over the odds or not receiving the best rates," he says. "If you have a cash ISA, then check the rate you are receiving is at the top of the best-buy tables."
Reviewing your life and other insurance cover should also be a priority as premiums have actually fallen over the past five years, which means that you may be pleasantly surprised when you look for new cover.
"In terms of areas such as utility bills and food shopping there are lots of useful internet sites that can save you cash," adds Gadd. "By far the market leader is moneysavingexpert.com."
Step 5: Generate extra cash
Finding ways to generate cash is essential when times are tough so see if you can turn your hobby into a money-spinner. Everything from selling items via eBay to restoring clocks can bring in some extra money. If the venture takes off it may give you a lifeline if you find yourself unemployed. There are plenty of specialists who can provide guidance, but the most effective starting point is the Business Links website ( www.businesslink.gov.uk), which provides an overview.
However, be warned that self employment is certainly not a guaranteed route to riches. Of the 500,000 small firms which are started every year, it is estimated that three out of five will fail due to cash-flow problems or bad management.
Step 6: Start looking for a new job
As soon as you hear rumours that your position could be under threat you need to see what's available in the job market. Speak to friends and former colleagues in case they've heard of potential openings in your field.
According to Jenny Ungless, life coach at jobs website Monster.co.uk, the key to success is staying one step ahead of potential rivals. "If redundancy is going to be on the cards it is worth being proactive and starting to look for alternative forms of employment prior to any official decision being made," she says.
"As well as the usual avenues, such as recruitment agencies, you should also be prepared to be flexible and consider a different role to your existing position," adds Ungless.
It may also be worth learning a new skill/qualification in your free time so that you have something to fall back on should you need it, she adds. "While the economic downturn isn't going to be easy for any of us, on the plus side there may be an opportunity to diversify, broaden your skill set and seek out some new opportunities."
'I wouldn't be without employment insurance'
Kevin Hill took out unemployment insurance after joining a new business venture – and found himself claiming on the policy just six months later.
The married father-of-two, who lives in Hastings, East Sussex, was earning £65,000 a year as a sales manager when the company announced that it was going to have to make cutbacks.
But thankfully the 49-year-old, who had been paying £55 a month to Ant Insurance, was covered to the tune of three quarters of his salary for 12 months.
"I am so pleased that I took out the insurance," he says. "Although it was a shock to be made redundant, I had the comfort of knowing that I would receive some money."
Despite being on a good salary, his employment contract only gave him one month's notice and a recent house move had swallowed a lot of the family's savings.
"I felt that we didn't have a sufficient financial cushion should the worst happen," he explains. "My mindset may be 20 years younger but my CV shows I'm actually approaching 50, so I was concerned about finding an equivalent job in the future."
Kevin used a variety of websites to scour the market for the best deals on a short-term income protection policy. "I wanted protection for all my essential outgoings – not just my mortgage but also my utility bills and weekly food shopping."
He has nothing but praise for the way Ant handled his claim when the company axe fell at the start of the year – and advises every employee with dependents and financial commitments to consider taking out a policy.
"At the back of my mind I was worried they would find a reason not to pay out but they were superb," he says. "I wouldn't be without insurance as it's proved its worth. Everything is uncertain at the moment so it's nice to have the back-up it provides."Reuse content