Managing your bills on a monthly basis has become commonplace in the majority of UK households. Most people follow a very simple and effective formula for planning their budget. They simply figure out how much money they make every month, and subtract their expenses. There is however, one serious downfall to this system; it does not factor in the time shift of income and bills.
Most jobs pay on the 1st or the 28th of the month, and many bills are charged every 30 days. What this means is that eventually you may encounter a situation where you have a bill that is due several days before your pay cheque is expected to arrive.
In 2010, a report from BBC reported that approximately 20% of UK citizens were living pay cheque to pay cheque. In light of this, what would happen if one of these families encounters an unexpected bill? For instance, their car breaks down or their washing machine breaks. Both of these issues can present a stressful situation for modern families.
Having a crisis plan as part of your budget can greatly alleviate stress caused in these events. Firstly, make sure that you are setting money aside every month for an emergency. The general rule of thumb is to put away 10% of your monthly income into a savings account, and don’t touch it until you absolutely need it. The best thing about this system is that the money is not wasted. If you have still not needed the money well into the future, it could be put towards retirement or a holiday.
Alternatively if you need the cash now, take out a short term loan. Paying a few pounds in interest is signiﬁcantly better than missing a mortgage payment, or having the lights cut off. A payday loan can be useful even if you do have an existing emergency fund. If you have invested your emergency fund into a GIC or locked investment program, often removing it could mean that you lose hundreds of pounds in interest.