Opinion: Dealing with personal financial challenges in these tricky times

By Michael Reid, managing partner, Meston Reid & Co

MUCH is written about the current cost of living crisis and low or non-existent wage increases, coupled with inflationary pressures on everything we buy. There is no doubt that it has created the most difficult conditions for many years.

Unsurprisingly, our insolvency team are finding that more people are seeking personal financial advice.

When one’s level of income is falling behind rising prices, a strain is imposed upon the household. Most of us have a relatively set amount of income e.g. a job, pension or state benefits, but what happens when there is simply not enough? 

While the first reaction tends to be one of panic and uncertainty, a clear head is required to look at matters objectively. The key areas of focus when looking at what is affordable is the level of income and essential expenditure. 

Clearly, cutting back on any type of expenditure is never an easy task because each person becomes used to a certain standard of living.

It is hard to make choices which reduce that standard and everyone has a different view on what is essential. For example, does essential expenditure include an expensive mobile telephone/contract, or TV package?

When difficult choices are being made, an independent second opinion helps to introduce a sense of reality and pragmatism. We all have to eat and keep a roof over our head, but choices may mean a different basket of food at the supermarket, selling the car, reduced entertainment or hobby costs, or downsizing accommodation.

If a person is faced with the option of eating or heating, or how to feed the children, the room for manoeuvre is restricted, and there is more evidence of family/friends being asked to help, together with food bank visits.

A key step in taking charge of your finances is to prepare a monthly budget that covers a full year. Taking a 12-month view helps to identify those months when expenditure is higher than normal. For example, it may well be acceptable to spend a little more in some months e.g. at Christmas, if there are other months when you expect to have reduced outgoings, and undertake to stick to the budget.

Once a budget has been prepared, it should be reviewed no less than quarterly because it is human nature to prepare the initial budget in an optimistic light, which means that the reality of the level of bills to be paid and monthly shortfall will require a revision as the months pass.

Again, unpopular choices may well have to be made and will help focus upon what is genuinely “essential”. Not a pleasant task, but necessary in the current climate.

There are plenty of sources of a standard income/expenditure analysis e.g. using the Meston Reid & Co website, www.Scotdebt.net is one option. Using a bespoke document will provide a memory trigger in order to ensure that all items are included in the assessment.

Even if you have little disposable income after paying essential expenditure i.e. mortgage/rent and utility bills, there remains an opportunity to assess where savings can be made. This may include undertaking a mortgage review or asking for a mortgage deferral for, say, three months. Perhaps switching utility providers will reduce your costs or a frank discussion with your landlord.

There are many sources of information about personal financial management and plenty of ways to access help, from various money websites and the banks to Citizens Advice and independent financial advisors. Look around and judge what source is best suited to you.

Your budget will take account of loan repayments and other creditors. Thus, when you have credit card repayments that stretch the family budget, you need to decide how best to tackle them. For example, you may elect to pay the minimum sum for a month or so while remaining mindful of adhering to the terms of every credit agreement as falling into arrears can become a serious matter.

The general experience at the moment is that creditors, banks and HMRC all make it clear that they want to help wherever possible. If there are pressing creditors, why not have a chat with them, explain your position and discuss a reduction in monthly payments for a set period such as six months.

If it all becomes overwhelming and there is no realistic hope of dealing with the situation, your thoughts might turn to debt relief mechanisms such as a trust deed, bankruptcy or the debt arrangement scheme.

Each of these has merits and if one is to be used, individual circumstances must be considered before choosing the appropriate route. Experienced advice is essential rather than what you might hear from family/friends, or that bloke in the pub .

Whatever happens, don’t feel alone, embarrassed or afraid. Many others are in a very similar situation. Advice is available and you should not feel shy about speaking up and taking action.

Michael Reid is managing partner at Meston Reid & Co, an Aberdeen-based chartered accountancy practice with strong expertise in tax, audit, insolvency, corporate finance, business advisory, payroll and landed estates. The firm, based at Carden Place, has a broad range of clients, from contractors in the energy sector to large businesses with international operations.