Two in five hit by unexpected bills

20th June 2023

Two in five people (40%) have been hit by an unexpected expense in the past 12 months costing them £1,851, up £394 in a year.according to research by Hargreaves Lansdown.

The unexpected bill was most common among those aged 18-34 – half of whom had an unexpected expense (49%).

Half (49%) of people were able to cover at least some of the cost with their savings – down from 54% a year earlier, and 21% were able to use their income.
16% borrowed from family and friends – making it the most popular borrowing option.

13% put at least some of the cost on an interest-bearing credit card, 9% used their overdraft, 9% used Buy Now Pay Later, 7% used a loan and 5% a payday loan.
Those aged 55 and over were far more likely to have savings to fall back on – at 71%.

Those aged 18-34 were the most likely to use an interest-bearing credit card (17%) or an overdraft (13%).

Sarah Coles, Head of Personal Finance at Hargreaves Lansdown said “It may feel like we’ve been blindsided by horrible surprises all year, but the proportion of people facing an unexpected expense has remained at two in five. The problem is that these expenses are much higher than we’ve seen before – and they’re forcing us to borrow.”

“This year, unexpected expenses cost an average of £1,851 – up almost £400 from a year earlier. For some, the pain was even more acute, with almost one in ten facing an unexpected bill of over £5,000.”

“The good news is that significant numbers of people were able to cover at least some of the cost from savings or income. Among higher earners this was likely to include some savings built up during lockdown, which hadn’t yet been swallowed up by the rising cost of living.”

“It’s why when we’re working age, we should be working towards having an emergency savings safety net of 3-6 months’ worth of essential spending in an easy access savings account for these emergencies. This is a sizeable enough sum to cover one or two horrible surprises. Alternatively, it can cover the absolute necessities if you’re unable to earn anything for a short period.”

“In retirement, the recommended minimum grows to 1-3 years’ worth of essential spending, because when you’re on a lower fixed income, and unable to make up any shortfall through earnings, you need much more wiggle room. If these figures seem impossibly high, don’t let it put you off. The aim is to save as much as you can afford, as soon as you can afford to do it, and any emergency fund is much better than nothing.”

“Unfortunately an awful lot of people have spent their way through any emergency savings over the past year and a half. Among those on lower incomes, people are more likely to have borrowed. Basic rate taxpayers are more likely to have used every kind of borrowing to cover the cost – aside from overdrafts – than higher rate taxpayers. Borrowing for these costs is particularly problematic at the moment, because with prices rising on all sides, it’s hard enough to stretch our money to cover our expenses, without having to make debt repayments on top.”

“The most common kind of formal borrowing is interest-bearing credit cards. If you use this option, planning in advance and tracking down the best possible rate is crucial. The average rate is the highest on record, but if you have a good credit rating you should be able to find a low-cost card, or one with an interest-free period. You’ll also need to consider how you will repay this debt – because making minimum repayments will mean paying interest for years.”

“More worryingly, plenty of people turn to particularly expensive borrowing options, especially young people. Those aged 18-34 were far more likely to use high-interest borrowing, with 13% using an overdraft, 9% using a payday loan, and 8% using a store card.”

“But the most common form of borrowing is to ask family and friends for help. Around one in six people borrow this way – rising to one in five among those under the age of 35, and while this may feel like a cost-free option, you need to consider how this will affect your relationship.”

“If you borrow from family, in some cases, family members will lend you the cash, trust you to pay it back, and leave you to get on with it. In other cases, for the period that you’re borrowing money, they’ll be watching you like a hawk, which can cause real friction. If you’re lending to loved ones, you need to think carefully how you want them to pay the money back and, crucially, what you’ll do if they miss payments. You’ll either be forced to chase them, which can damage your relationship, or you may need to write the debt off.”