How the cost of living could overwhelm us

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Rent, car loans, mortgages, credit cards, pay day loans, unsecured credit, overdrafts - with real wages falling, the amount of debt we are taking on is rising and the pressure we are under is increasing.

For many, a savings cash buffer to deal with shocks and rising prices is non-existent.

When it comes to the build up of debt, this is a classic story of supply and demand.

The digitisation of financial products - making many loans little more than a mobile phone swipe away - has meant that supply has become broader and easier.

Historically low interest rates have also made products cheaper, meaning that taking on debt appears to be low cost, in the short term at least.

The demand side has also ballooned as consumers have struggled to balance income and expenditure.

In seven of the last 10 years, real incomes have fallen, with the increase in prices higher than the increase in wages.

That means that in December, people have less household income than they did the previous January.

'Vulnerable'

Add to that the benefits freeze and the public sector pay cap and, in such a situation, borrowing can seem to make sense, to make ends meet if nothing else.

The picture painted by today's Financial Conduct Authority Financial Lives report makes for sobering reading.

Half of us are "vulnerable" when it comes to our monthly finances.

An extra bill, a period of illness meaning we are unable to work, an increase in interest rates on our mortgages, higher rents - all could lead to financial problems.

If debt or rent bills went up by £100 a month, nearly half said they would "struggle" with payments.

And "among those paying mortgage or rent, one in six state they would struggle if monthly payments increased by less than £50," the FCA survey revealed.

And £50 is a very small margin of error when it comes to people's household finances.

And with the Bank of England suggesting that interest rate rises are imminent, this is becoming a more salient point.

'Prepare'

It must be stressed that any interest rate rises will be small. If the Bank puts up rates by 0.25% next month, as many expect, then the typical variable mortgage would go up by £15 a month.

So, it would need two or three similar rate rises to put people under significant stress.

But, as Christopher Woolard, executive director of strategy and competition at the FCA told me, people should "prepare" themselves for the interest rate rise.

Once again the FCA report reveals the depth of the issues the UK economy is facing.

Falling real incomes, low productivity and lack of wealth creation in the economy has left people with few options.

Using up their savings and taking on more debt is the one many have plumped for.

As Andrew Bailey, the chief executive of the FCA, told me earlier in the week, some are wondering "how long this can go on for".

The challenge is to increase people's wealth so that their ability to resist shocks to the system - and they will come - is enhanced.

Increasing financial resilience should be the new watch words for businesses and government.

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