As even the largest economy in the world is getting rocked by the global financial crunch, a long-term survival plan is needed to bolster the household finances
By Jeremy Gates
When even the US President admits to panic in the air about the global financial system, anybody in charge of the household budget should be mapping out a survival plan.
"You really can't compare the 1987 crash with the scale of the problem today," says Colin Jackson at Ilford, Essex-based financial advisor Baronworth Financial Services.
"That was a brief global stock market plunge which soon righted itself. The current climate is so uncertain that you don't know who or what will disappear next, anywhere in the world."
Brian Dennehy, of Kent-based financial advisors Dennehy Weller, says the crisis is proving an acid test for investors led to believe that making money was easy in the past decade.
"Any investor with a rationally thought-through portfolio and the right level of risk shouldn't jump around in the present turmoil," he says.
"But somebody with a mish-mash of funds built up over the years without a plan in the first place could be really struggling."
In this crisis, however, even the 'experts' are frequently wrong-footed. How many of them, for example, ever imagined that the mighty Halifax-Bank of Scotland (HBOS) would be forced into the arms of Lloyds TSB?
The next 12 months will be rocky, so here's a checklist to bolster the household finances:
1. Try to build up savings when the pay cheques come in regularly. Yorkshire Building Society says 36% of households have savings of less than £500 - and that the average household, with monthly outgoings of £1,445 and accessible savings of £2,474, could survive only 52 days if its income stopped.
It clearly isn't enough, and the Government's recent promise to help with mortgage payments after 13 weeks of unemployment from next April - instead of the current 39 weeks - will help only a small minority of people already claiming benefits such as Income Support and Pension Credit.
Savers are actually the big beneficiaries of the credit crunch so far - because banks and building societies are desperate for their cash.
Royal Bank of Scotland (RBS) announced a 7.25% Cash ISA this week for those prepared to switch £24,000 worth of previous ISAs, including a 2% bonus for one year.
Andrew Hagger at Moneynet.co.uk says there are other great deals for savers: AA Savings offers a one-year bond at 7.25% on minimum £500, while Birmingham Midshires has an internet one-year bond paying 7.05%, with postal/telephone paying 7%.
2. Make sure your savings are safe, if necessary by dividing them between financial institutions to keep below the £35,000 guarantee from the Financial Services Compensation Scheme (FSCS).
Remember, the guarantee covers only one person with each institution. HBOS brands include Saga, Bank of Scotland, Intelligent Finance, Halifax and Birmingham Midshires, and only the first £35,000 held in total with all those providers would be protected in the unlikely event of an HBOS collapse.
Because savings accounts at The Post Office are operated by the Bank of Ireland, its guarantee on cash holdings is considerably higher at 100,00 euros - around £80,000. The best-paying Post Office account is the Instant Saver at 5.75%, including a one-year bonus of 1.5%, with six free withdrawals allowed per year.
The security of a Government guarantee gives added attractions to National Savings - including Premium Bonds - despite its recent decision to cut rates.
Nobody will ever need to queue for their cash outside The Post Office as they did outside Northern Rock.
3. Loans, and the cost of loans, are bad news for companies and households alike as credit dries up. Keep the costs as low as possible, if necessary by switching to a new credit card still offering 0% on existing balances.
Sean Gardner at MoneyExpert.com says the market is "approaching saturation point" on 0% balance transfer deals, so transfers fees will be the new battleground between rival providers.
Barclaycard fired the first shots by cutting the transfer fee on its OnePulse card from 3% to 2.5%, while maintaining a 14-month 0% deal.
Be sure to maintain all payments and other financial commitments - if necessary paying the minimum 2-5% monthly repayment on a credit card - to keep your credit rating unblemished.
If things get worse, it will be hard to regain a decent credit rating once it is lost.
4. Try to keep paying into long-term savings plans, particularly pensions. Only think of suspending payments if you are young and far from retirement.
With London's FTSE-100 of top shares in danger of sliding below 5,000 again, many workers with pensions based on managed funds are seeing their retirement pots fall in value.
However, anybody with at least 10 years to go before retirement should maintain full contributions, and some advisors urge them to step up their savings level.
"For pension investors a long way from retirement, market turmoil is as much an opportunity as a threat," says Tom McPhail, head of Pensions Research at investment managers Hargreaves Lansdown.
"They can pick up cheap units as they feed monthly contributions into the markets. Provided markets do eventually recover, the benefit of pound cost averaging could mean substantial gains."
Prudential's 2008 Retirement Savings Report says UK adults have already slashed pension contributions. Many of them will regret it when good times return.
5. Keep within the rules in running any bank or building society account to ensure that overdraft limits are maintained, or even slightly increased where the banks might be looking to clip them back.
On some personal accounts, there may be a condition that a minimum sum - possibly £1,000 or £2,000 - is paid in on a regular monthly basis.
Some mortgages which accept monthly overpayment might make this money available again for use in a tight corner.
6. Mortgages: the tighter your finances, the stronger the case for a fixed-rate loan rather than a tracker, reckons Moneynet's Hagger. And try to think in terms of five-year loans, rather then two, to avoid arrangement fees which can top £1,000.
There is also a good case for choosing a 'drop lock' mortgage, allowing borrowers on tracker loans to 'lock' into a fix whenever they think rates have bottomed out, because there is general agreement that rates will fall to stave off recession.
"The vast majority of drop locks are available with tracker mortgages, although they can actually apply to any loan with a variable rate," says Ray Boulger at broker John Charcol.
"Once borrowers choose a drop lock option, they have to choose between a loan with a big fee and a low rate, or vice versa. If they intend to exercise the drop lock within a short time, like a year, it might make sense to take a lower fee with a higher rate because a high fee would cost them dearly over a short period."
7. Insure against the worst - especially losing your job through redundancy, accident or sickness.
Shane Craig at specialist broker Paymentcare says: "We are being bombarded with enquiries, particularly from people who find cover offered by High Street lenders to be exorbitantly expensive.
"As recession risks increase, workers want the safety net of knowing they can cover outgoings in the event of being made redundant."
Craig says most people can suffice with short-term income protection plans, guarding against accident, sickness and unemployment by paying out for a maximum 12 months.
On his standard policy, monthly premiums of £44 would pay £1,000 per month for a year of unemployment. Workers usually get cover for a maximum 50% of their final salary, up to a maximum of £1,000 per month.
Both Paymentcare and British Insurance are specialist brokers offering good value protection against the worst.
8. Pensions apart, is it still worth buying shares? With the Russian, Chinese and Indian markets all down massively and many shares in London trading at barely a quarter of their peak price, it is highly likely that many shares are trading at a fraction of their real value.
The problem is that nobody, yet, knows which ones these are, and there is scope for all sorts of malarkey before the credit crunch works through the system.
Dennehy Weller has devised a portfolio which enables investors to make a choice in line with their risk profile and to allocate money to different markets around the world.
But shares, and probably even managed funds, are probably only for those who can take a five-to-10-year view about their money, and who won't be knocked out if some of their money vanishes into thin air.
9. Don't waste valuable money on unnecessary things: Moneynet's Hagger cites pay-day loans, from £100 to around £1,000, which are repayable on the borrower's next pay day.
The only requirement is for applicants to have a job which pays a salary into a bank account with a cheque book or debit card.
"Billed as the easy, no-hassle way to bridge the gap until pay day, these are the very worst villains of the piece, some with interest rates equating to 1.355%," he says.
10. Travel: as a habit, it is too ingrained in many people's minds for them to give it up.
But always pay for travel with a credit card if possible, even though some companies charge a premium for using a card, and always go with a travel company that is bonded to protect your cash if it collapses.
Simeon Linstead, head of personal finance at uSwitch.com, says: "For the fortunate number of customers who purchased a flight with a credit card, a refund should be quite straightforward when a company fails.
"Credit-card purchases are protected by section 75 of the Consumer Credit Act, which means the card company is jointly liable for the purchase and you have a legal right to a refund.
"In addition, consumers holding a Visa debit card have similar rights to those with a credit card, in what is known as a charge-back scheme.
"Unlike the credit-card protection, there is no maximum or minimum limit on the purchase, however, you must apply for compensation within 120 days of the date the goods were due to arrive."
Linstead urges travellers to think hard about the inherent risks of arranging DIY holidays if they want to enjoy the best protection against trouble.
Independent travel has clear risks when the industry is in such a fragile state; even if you get your money back from an airline collapse, you might still have to pay for accommodation arranged independently - even if you can no longer get there.
Never leave these shores without travel insurance. An Amex Insurance Services report claimed this week that one in four Britons on holiday this year won't bother to arrange any travel cover - despite the risk of having to spend thousands of pounds on repatriation and medical fees.
:: INFORMATION: www.uSwitch.com (0800 093 0607); www.moneynet.co.uk; Dennehy Weller (0208 467 1666); Post Office enquiries to branches and at www.postoffice.co.uk; Paymentcare (0844 406 4088 and www.paymentcare.co.uk); British Insurance (0845 017 5178 and www.britishinsurance.com; Baronworth (0208 518 1218).
POUNDNOTES
:: If you can't make your finances balance, try to unearth a lost savings account from the dim and distant past. The free account tracing website (www.mylostaccount.org) received more than 140,000 enquiries in its first six months since launch on January 30 - a rate of more than 760 per day - in pursuit of some of the £1 billion reckoned to be sitting in dormant bank, building society and National Savings accounts.
The scheme combines three existing account search schemes formerly operated by the British Bankers Association (BBA), the Building Societies Association (BSA) and National Savings & Investments (NS&I).
:: Interest rates on store cards are climbing just in time for Christmas, warns Michelle Slade at Moneyfacts.co.uk, who has spotted that Karen Millen, Oasis and Principles have upped rates by 4.3% APR to charge 28.9% APR on purchases.
Slade says that last year, store card providers were obliged to tell customers when they charged more than 25% APR on card purchases to give them the option of finding a cheaper deal elsewhere.
When the rate is as high as 28.9%, says Moneyfacts, anybody buying an item for £500 and repaying the minimum monthly repayment will eventually pay £565 in interest and take 11 years and nine months to fully repay the debt.
:: Homeowners are in deeper financial trouble than tenants, says John Fairhurst of debt advisor Payplan. He says the average homeowner using his company owes more than £40,000 in unsecured debt, compared to the average £27,000 owed by those still paying rent.
"Despite an average household income of £2,200 per month, indebted homeowners are left with an average of only £270 of disposable income a month with which to repay their debts," Fairhurst says.
"This is often far below the amount needed to service monthly debt repayments, and a survey of new callers to Payplan last month showed that 50% had recently used a credit card to pay their mortgage or a utility debt."
:: Finding a new mortgage in today's difficult market increasingly requires expert advice. Since its launch four weeks ago, Impartial.co.uk has seen more than 450 mortgage advisors join its database, giving consumers a database of over 6,300 mortgage professionals to search, and more than 7,000 consumers have already been passed to advisors.
