FOOL'S EYE VIEW
How To Cope With Financial Disasters

By Cliff D'Arcy
July 29, 2003

A Foolish reader called me yesterday on behalf of a friend who is currently hospitalised following a nasty motorcycle accident - ouch! It appears that this chap will be in hospital for some time and, quite naturally, is worried about the state of his finances while he's flat on his back.

As it happens, in a three-part series last week, we commented on the support available to homeowners who are having difficulty meeting their mortgage repayments. We could just rely on the government (always a bad idea) or private insurance (an expensive option), but there's more to it than that. In any event, our hospitalised friend doesn't have a mortgage, so what other help is available?

Accidents are just one of the countless misfortunes that can throw a spanner in our financial lives. Below we look at some of the most common reasons for mortgage arrears (and most other debt problems).

1. Financial mismanagement is a huge concern

Almost a quarter of all mortgage arrears (around 24%) are caused by simple financial mismanagement: the inability to spend less than we earn.

• If you think you have this problem, take our Financial Health Check to see how you can turn things around.
• If over-spending has got you into debt, salvation is at hand in our Get Out Of Debt Centre.
• Finally, if you're serious about trimming your expenses, try joining the discussions on our Living Below Your Means board, where you can meet Britain's budgeting experts!

2. A temporarily fall in earnings can cause problems

More than a fifth of all mortgage arrears (23%) are caused by a reduced income following the loss of overtime or bonuses.

Clearly, it's a good idea to try to get by on your basic salary or, failing that, save some of your overtime pay and bonuses to tide you over in the bad times. Learn more about saving for a rainy day and finding higher interest rates here.

3. Losing your job can be devastating

Almost a fifth of arrears (19%) are caused by redundancy and unemployment.

One of my close friends volunteered to be made redundant by his blue-chip employer last year, attracted by the enhanced severance payment on offer. However, his redundancy cheque (and all his savings) eventually vanished because he has a family and an enormous mortgage to support. Luckily, he found a new job after a year - just as the last of the money ran out.

If you're worried about your job security, or your employer's financial strength, read what to do if your employer is struggling and beware of failing employers. If you're already out of work, or you believe it's about to happen, read about dealing with unemployment.

4. Watch out for accident, sickness and injury

Lumped together, these are responsible for around a tenth of arrears (10%).

A serious illness or injury can put you out of action for months and leave your finances in a sorry state. If you find yourself in this situation, look for support and sympathy from your employer, the state (Benefit Enquiry Line: 0800 88 22 00), your creditors, private insurance, and friends and family. For more advice, read this article on coping with the high cost of being ill.

5. Splitting up often harms your finances

Divorce, separation and relationship breakdowns account for less than a tenth of mortgage arrears (9%), but are almost always extremely traumatic for all concerned.

A recent survey showed that men usually profit from divorce, since they usually reduce their financial support for their partners and families. What's more, separation normally leads to a decline in the finances of women, who often end up taking care of children on a low income. If you're in this situation, visit our Women's Finance Centre for more help and advice.

6. Dying: the final financial problem

Death may be the last thing we'll ever worry about, but our families or other successors stand to inherit our financial problems!

For advice on writing a will, and insuring your life, health and possessions, read how to protect yourself and your family. If you do decide you need life insurance, read how to shop around for protection (I saved thousands of pounds using this website).

Of course, there are other unexpected events that can throw your finances into a tailspin, such as a house fire, having your car stolen, being mugged on holiday and so on. In general, these problems are solved by home, motor, travel and other insurance. But be warned: whatever insurance policy you need, make sure you shop around, or you'll become a victim of the cruel Rule of Three!

So, you can see that the skills we need to manage our money during the hard times are no different to the talents we use to build wealth: sensible budgeting and spending, borrowing, saving, insuring and investing. If only they'd teach us these rules at school!

More: Go to our Insurance Centre | Savings Centre | Avoid Rip-Offs: Become A Money Wolf.