Even carefully laid financial plans can go astray. Financial shocks, such as losing your job or being too ill to work, can affect your financial security. Yet, figures show many Brits aren’t taking the necessary steps to improve their financial resilience. Andy Knight, Chartered Financial Planner at Pembroke Financial Services, explains what steps you can take to improve financial security.
A financial shock can cause short-term stress and money worries. But they can also have a long-term impact, for example, if you’re forced to dip into savings earmarked for something else, stop contributing to your pension, or need to take a mortgage holiday. Preparing for the unexpected can help place you in a position where financial shocks can be managed.
Brits are failing to prepare for financial shocks
Despite feeling confident about their financial situation, a survey found many Brits aren’t in a position to manage financial shocks. The survey rated respondents in four main areas:
- Getting the basics right
- Managing borrowing
- Protecting against the unexpected
- Planning for the future
Out of a score of 25, respondents scored just three on protecting against the unexpected. Planning for the future scored only slightly higher at five. While Brits are good at keeping on top of day-to-day spending and borrowing, looking further ahead is often overlooked.
Andy noted: “While we hope things will stay on track, planning for the unexpected can provide security. As part of your financial plan, protection against the unexpected should be considered. No one wants to experience a financial shock, but they do happen. And they’re often outside of your control. Taking steps to consider how your finances would hold up and what you can do to improve resilience is important.”
Securing your finances in the short term
When a financial shock occurs, it’s usually your short-term finances that are your focus. This may be because your regular income has stopped or you need to dip into other assets to cover essential outgoings. Luckily, there are steps you can take to help secure your short-term finances when something does happen.
1. Have an emergency fund. We should all have money set to one side for a rainy day. This money should be easily accessible and, ideally, cover between three and six months of expenses. This means you don’t have to worry about regular outgoings should a financial shock interrupt your income. It can give you some space to deal with the shock and put a long-term plan in place if you need to, without worrying about how you’re going to meet this month’s bills.
2. Reduce debt. Borrowing can be incredibly useful, and it’s likely you’ll take on a range of different debts throughout your lifetime. However, paying down debt while your financial situation is secure can help build resilience too. For instance, overpaying on a mortgage may mean you have an opportunity to take a payment holiday should a financial shock happen. Having fewer financial commitments can make it easier to manage a financial shock.
3. Consider income protection. Income protection is a financial protection product that can provide a regular income if you’re unable to work due to accident or illness. These policies typically pay out a percentage of your salary, say 70%, until the policy ends, you return to work or until retirement. Knowing you have a policy that will provide an income should you need it can provide peace of mind and allow you to focus on recovering.
Andy said: “These three steps can help improve your resilience, placing you in a better position to overcome financial shocks and the short-term instability they cause. But you also need to consider the long-term impact too.”
Ensuring your long-term plans stay on track
Andy continued: “In some cases, a financial shock can have a long-lasting impact. This may be because the effects move from short to long term or due to the decisions you make affecting other plans. But what can you do?
“I’ve already mentioned that income protection products can be a useful way to create an income while you’re unable to work. But other insurance policies can be useful in the event of a financial shock and are worth considering too. Critical illness cover, for example, will pay out a lump sum on the diagnosis of certain illnesses that could mean you need to give up work permanently or need to take an extended period off. This lump sum may allow you to take steps like paying off your mortgage and improve your financial situation over the long term while allowing you to focus on other areas of your life.”
When taking out insurance policies, it’s important to weigh up the different options to see what is right for you and your priorities. Please get in touch if you’d like to talk about financial protection policies.
Andy added: “During and following a financial shock, it’s important to review your finances with your long-term goal in mind. You may, for instance, have paused pension contributions or used savings to get you through the short term. Understanding the impact of this can help you stay on track for long-term goals. In some cases, a review will simply provide peace of mind that a financial shock hasn’t derailed plans, in others, it may show you need to take additional steps to remain on track.”
Please contact us if you have any questions about your financial plan and ability to weather financial shocks. Our goal is to help you create a financial plan that you can have complete confidence in, including when the unexpected happens.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.