Households on 80% of their usual income would have just £1 a week left over after normal spending, according to analysis of ONS household disposable income and spending data.
The analysis from Royal London reveals that a reduction to 80% from the average household disposable income of £733.75 a week (£38,155 a year, source: ONS) to £587 a week, (80% of household income), could leave many households struggling to meet their usual weekly spending and unable to cover any large expenses without going into the red.
Typical household spending before the coronavirus crisis was £585.60 a week, or £2,537 a month, according to the ONS*, which is just £1.40 a week less than the amount of income a household receiving 80% of its usual earnings would receive.
While some regular spending will naturally fall as a result of people observing the lockdown, such as leisure and eating out, some areas of spending, such as energy and food shopping, will rise.
Some households may lose more than 20% of income, including those who are left out of the various support schemes and also households with high earners who experience a drop in income greater than 20%, to the monthly maximum of £2,500 available on the Government’s job retention scheme. For these households, the need to cut regular outgoings, which could include large mortgage or car payments and private school fees, will be urgent.
Becky O’Connor, personal finance specialist at Royal London, said: “There may be no avoiding debt for some people in the coming months as households find it hard to live on 80% of their earnings.”
“For high earners, the proportionate drop in income to £2,500, the monthly cap on the Government retention scheme, may be more dramatic, forcing them to make more drastic changes to their spending.”
“There will be a natural decline in spending in some areas, such as holidays, petrol and eating out. However there will also be some spending increases to take account of in the coming weeks, such as home energy and possibly food bills, particularly for families whose children were receiving free school meals.”
“Cutting spending to the bare bones for a while is sensible. Speaking to lenders, landlords or other providers, such as a child’s nursery, to ask for a period of reduced payments will also help give breathing space. Regularly reviewing the best deals on the market for things like broadband and energy should be added to your to-do list. Reviewing your direct debits for anything that can be cancelled or frozen, such as gym memberships, to make sure nothing leaves your account unnecessarily, is also a good idea.”
“While there is some inevitability to personal financial struggles for millions right now, there are ways to prevent this emergency from plunging households into debt that could take years to recover from.”
Some of the best ways to save on regular outgoings during the coronavirus include:
- Use a comparison or automatic switching service for the best deals on regular household bills like energy, broadband and mobile phones
- Ask lenders to pause repayments if they are – or are likely to be – unmanageable in the short term
- Make sure you are on the lowest interest rate possible for credit cards and personal loans
- Freeze any subscriptions you are not currently using, like gym memberships
- Seek refunds on travel season tickets
- Renewing your home insurance? If you aren’t going out, you may not need personal possession cover outside the home, which comes as standard with some policies (though you may want to add it again after lockdown)
Things not to cut:
- Keep your pension contributions going, particularly as you will be receiving contributions from your employer based on your own contribution
- Life insurance and income protection insurance premiums should be maintained as these are designed to pay out should the worst happen
- If you need good broadband for work at home, don’t switch to a cheaper deal if the compromise on speed would cause problems
Ways the coronavirus lockdown will have reduced normal spending:
- Travel/ petrol costs
- A fall in consumption of cups of takeaway coffee
- No eating out
- Reduced leisure (gyms and activities) and culture (ie. theatre and concerts) spend
- ONS spending data https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/expenditure/bulletins/familyspendingintheuk/april2018tomarch2019
- The ONS average household income figure used here is a non-equivalised figure produced for Royal London not normally published by the ONS. Equivalised household income figures (taking into account the number of individuals) are published here https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/householddisposableincomeandinequality/financialyearending2019
This article was written by Becky O’Connor, Personal Finance Specialist, Royal London who are the UK’s largest mutual life, pensions and investment company.
You can read her article in full here.