The percentage of people who haven’t been able to budget for unforeseen expenses has gone up from 54% to 46% over the last six months.
Data from a 2,000-person study conducted in October 2023 by Opinium for Hargreaves Lansdown indicates that these unforeseen expenses have caused a significant financial burden, with one in twenty respondents having bills totalling more than £5,000. The average cost of these charges is £788.
Merely 14% of individuals had extra income to deploy, and only 40% of people could rely on their savings to meet the majority of these costs. As a result, 46% of people had to borrow money to pay for these bills.
Hargreaves Lansdown head of personal finance Sarah Coles says: “There have been more nasty surprises lurking around the corner in the past year – with 54% of people hit with an unexpected cost out of the blue in the past 12 months. On average, they’re setting us back £788 each, but one in eight people forked out more than £2,000, and one in 20 spent £5,000 or more. Almost half of people are having to borrow to cover the cost.
“The number of expenses out of the blue has been growing. In October, only 46% of people said they hadn’t had these costs in the previous year – compared to 54% six months ago. Part of the problem is how we’ve been trying to cut our costs as the price of everything rises. Foregoing routine maintenance and repair – whether it’s your car, your home or your pet – means small niggles don’t get solved until they’ve turned into bigger problems. Another issue has arisen as we get used to higher prices: if our direct debit for our energy bill has gone up, we may think we’re covering the higher cost. However, if it hasn’t gone up enough, we could be set for a shock bill.
The cost-of-living crisis has made it challenging for people to handle unexpected costs, leading to one in four dipping into savings and nearly half resorting to borrowing. Building an emergency savings safety net is essential, with any amount being better than none, and revisiting savings when income increases is key for financial stability.
Sarah Coles says: “Meanwhile, our ability to absorb these one-off costs has been hampered by the cost-of-living crisis. The research also showed one in four people have eaten into their savings because of rising prices, and one in 20 have emptied their accounts.
“It’s one reason why almost half (46%) borrowed to cover the cost of emergencies – including 15% using a credit card, 7% borrowing from family and friends, 7% using an overdraft, 4% using a loan, 3% using buy-now-pay-later and 3% a store card. While borrowing may be a short-term solution, in the end it adds to the problem, because extra interest doesn’t just eat into your income, it adds to the overall cost, so nasty surprises get even nastier.
“This is why having an emergency savings safety net is so valuable. When you’re working age you should be working towards 3-6 months’ worth of essential expenses in an easy access account, and when you’ve retired it should be 1-3 years’ worth. With this in the bank, if you have several unexpected costs out of the blue, you have something to fall back on. However, it’s worth highlighting that if this feels like an awful lot, having some savings is always better than having none. The key is to put aside whatever you can afford, as soon as you can afford to do so, and pledge to revisit your savings when you next get a pay rise – before you have chance to get used to the extra money. This money needs to be in an easy access account, but it’s vital to shop around for the best possible deal – including online accounts and cash savings platforms.”
Men are more likely to borrow for unexpected expenses, while higher rate taxpayers experience these expenses more frequently, often using borrowing options like overdrafts.
Coles adds: “Men are far more at risk of having to borrow than women, with only 37% able to cover the cost of unexpected expenses from saving, compared to 44% of women. They’re also less likely to cover it from income – at 16% compared to 12%. This owes something to the fact that their emergencies were more expensive – at £833 compared to £730. However, it may also owe something to the fact that on average they earn more.
“Higher rate taxpayers are more likely to have had an unexpected expense (73% compared to 55% of basic rate taxpayers). This comes down to the fact that they’re more likely to have acquired more – whether that’s a bigger house, more cars, or horses rather than hamsters. It gives them more to go wrong, and a higher bill for fixing it – at £1,258.
“They’re also less likely to have covered these costs from savings (22% compared to 45% of basic rate taxpayers), and exactly as likely to have used income (14%). On one level this is surprising, because we know higher earners tend to have more savings. It may be that they have fixed them for a period, so can’t access them in an emergency, or that they are saving for something specific, so don’t consider those savings to be available.
“However, an awful lot of it will come down to the fact that higher rate taxpayers are far more comfortable with borrowing. The HL Savings & Resilience Barometer shows they borrow more, and more as a percentage of their income. With more money coming in, they’re not afraid of running up a debt, because they feel they’ll be able to pay it off more quickly.
“It may also be why they’re also less likely to have used a credit card than basic rate taxpayers (13% compared to 17% of basic rate taxpayers) and vastly more likely to have dipped into their overdraft (19% compared to 3% of basic rate taxpayers). They’re not taking this debt seriously, and considering the best way to carry debt and gradually repay it, they’re just running up an overdraft, with the confidence they can pay it off on payday. The problem they need to consider is what they would do if the next nasty surprise was losing their job.”
Younger individuals (18-34) face more frequent and expensive unexpected expenses, with a reliance on borrowing due to limited savings and spare income. Parents also encounter higher expenses and fewer resources to cover them.
Coles says: “Those aged 18-34 also face major problems with unexpected expenses. Some 67% have faced one in the past 12 months – compared to 44% of those aged 55 and over. This may be because a lack of spare income makes it difficult to keep on top of things, or a lack of experience makes it harder to predict big expenses. To make matters worse, the younger people are, the more expensive their emergency – younger people (aged 18-34) spent £979, while the squeezed middle (aged 35-54) spent £762 and older people (aged 55 and over) spent £672.
“Younger people are far less likely to have savings to cover these one-off costs, with 25% using mainly savings – compared to 39% of the squeezed middle and 58% of older people. Those aged 18-34 are also far less likely to have the spare income to pay for emergencies – at 6% compared to 18% of older age groups. It means younger people are far more likely to borrow – at 69%, compared to 43% of the squeezed middle and just 24% of older people.
“Parents are also at risk. They’re less like to say they avoided an emergency expense – at 28% compared to 56% of those without children. They also spent far more on them – at an average of £1,065 compared to £636 of those without children. This may be because family life has so many moving parts, and therefore so much to go wrong.
“They’re less likely to have had savings to cover the cost of a nasty surprise (28% compared to 51% of those with no children), less able to cover it from income (11% compared to 16% with no children), so they’re more likely to have borrowed (61% compared to 33% of non-parents).”