At Creditspring, our mission is to put UK consumers at least one step closer to financial stability. Why? We reckon financial stability is one of the most important things you need to live a great life and is the cornerstone to achieving financial wellbeing. But, with 40% of the country having under £100 in savings, the implication is that almost half of the country is going to struggle to live to their full potential. This is crazy.
Financial stability is based on lots of different things. At its most basic, we can look at it as the difference between your income and your expenses. To have some level of financial stability, your income needs to be greater than your expenses. The bigger the difference, on the whole, the more financially stable you are. Not rocket science, we know, but bear with us!
If your income and expenses are equal, you might be ok, but if anything unexpected happens, you could get knocked off track. This is not financial stability, but financial fragility. If your expenses are more than what you earn, you’ll need to use credit for basic living expenses – let alone dealing with any financial ‘surprises’ that might come your way. If you’re in this position, credit might be expensive, your risk of getting knocked off track rises even more. Before you know it, there’s no stability in sight, and your odds of getting back on track feel like they’re gone with the wind.
When you have financial stability, it means you have breathing room. Instead of focusing on putting out fires, you can focus on the things in life that are important to you. That leads to a healthier, happier and more productive you over the long term, which great for your family, and good for society. Without financial stability, you are in a constant state of worry rather than wellbeing. What happens when you worry? You lose focus, get anxious and stressed, and the cycle continues – making financial stability feel even further away.
The more financially stable you are to begin with, the easier it is to become even more stable. In terms of your income and expenses, when you earn much more than you need to spend, it’s easy to deal with unexpected expenses, and easy to put money away (for savings, emergencies or just a rainy day). The more financially stable you are, the easier and easier it is to hold onto that stability. You won’t need credit as badly, the cost of credit will keep getting lower and lower, and your ability to handle financial emergencies will get better and better. This is the wonderful effect of compounding! Yet another reminder of why getting financially stable is so important, and so beneficial.
But unfortunately, the reverse is just the same. The less financially stable you are, the more likely you are to become even more unstable. When you do need to borrow, the cost of credit will probably go up, because lenders are more likely to see you as a risk. Pricier credit further reduces the gap between income and expenses… making you even more financially unstable. This leads to even less breathing room, less time to make important financial decisions, less options in general, and a poor sense of financial wellbeing.
Before you know it, the odds become stacked against you. Many people assume that those on lower incomes are bad at managing their finances, but we believe the reverse is true. People managing modest budgets can actually be better off in terms of financial stability, because they’ve often got to be laser-focused on their finances all the time. However, the backdrop is bleak, and a lot riskier for them. When you’re not earning a lot, even small mistakes can be extremely costly. If you’re in a financially stable position, and can keep your expenses well below your income… small mistakes are just that, minor setbacks.
Your level of financial stability is never fixed. It’s constantly moving up and down in response to life. This is why it’s so important to have as big a buffer as possible! Since we define financial stability as the difference between your income and expenses, it follows that the two main things that can move your stability is a change in your income, or a change in your expenses.
For example, a change in your income could be because you got a salary or wage increase(increased financial stability!) or because you lost your job (decreased stability). Or, as we are seeing more and more today, maybe it fluctuates constantly due to volatile working hours. Gig economy workers and people on zero hour contract are much less financially stable than people on a stable income, just due to the nature of their pay.
A change in your expenses can also move your financial stability. If all of your expenses suddenly drop (like if you pay off your mortgage, or make a final car loan payment), you will be more financially stable. Unfortunately this is fairly rare, and what we see much more often is a shock drop in financial stability due to a sudden, unexpected expense. This is one of the biggest risks out there, and with 40% of the country holding under £100 in savings, seemingly small unexpected expenses (like your washing machine breaking or new school clothes) can make the difference between being financially stable and financially fragile.
A small expense takes you from being stable to fragile. Then, as a result of your instability, you need to use expensive or confusing credit to pay for it, raising the risk that your stability will drop even more. As life gets tougher… it gets harder and harder to keep your head above water.
Once you cross the line from stable to fragile, the negative compounding kicks in… So you really don’t want to go there.
Due to the compounding nature of financial stability, and due to its importance in living a healthy and happy life, it follows that staying financially stable (and never crossing the line into fragility) is really, really crucial. However, life doesn’t always play along, and things beyond your control can very easily upset the apple cart.
To make sure you don’t cross the line, it’s a good idea to ‘smooth’ the gap between income and expenses, so when unforeseen events do happen, you’re prepared. To do this, you can either borrow money therefore boosting your income, or spread the cost of your expenses over time. We see ‘credit’ like this offered in both ways. People might buy a washing machine on credit (spreading the cost of the expense), or take a loan (supplanting income) to pay for the washing machine. Both get you to the same place.
One problem with this strategy is that by the time you’ve applied for either type of credit, you are typically at a point where you have crossed from financially stable to fragile. This means that the cost of the credit is going to be very high, to compensate the lender for the extra risk (supposedly). Think high interest rates, or hidden fees. So once again, we see the negative compounding effects kick in!
In the real world, we see this play out when someone takes a payday loan (20x more likely to have severe debt problems in the future) or needs to buy something using rent-to-own credit (often times we see people paying more than 2-5x the typical high street price for a simple washing machine). This is a massive problem, and the reason why we are seeing so many issues in the UK consumer credit market. People only get credit right when they need it, so it’s always going to be expensive and risky. But does it have to be? We don’t think so.
We believe that providing people with access to safe, simple and affordable credit, before accidents happen can help them remain on firm financial footing and actually improve their financial stability. They don’t need to worry anymore about being financially fragile and they can carry on with their lives and keep building up their stability. When accidents do happen, they can borrow at a very affordable rate so they stay on track. This is a similar concept to ‘preventative health care’ or ‘renting’ a safety net.
The thing with financial stability is that it’s not solid. In fact, it’s the exact opposite – it’s fluid. As your income and expenditure change (no two months are the same, after all) so does your financial stability, so it’s important to recognise that. Financial stability is something that needs to be maintained and managed over time.
So, how do you maintain financial stability? Keep your bills lower than your income, take an active interest in managing your finances, and take the time to understand what you’re getting into when you borrow money.
And why not take a look at a Creditspring membership, designed to help you smooth financial stability, just click here.