At Magenta, part of our role is to ensure that our clients will still feel financially secure in the event of unexpected events and crises and will still be able to reach or maintain their desired lifestyle.
Even with the most careful financial planning, shocks can happen and by definition, financial crises are unexpected and out of our control, so it’s important to have contingency plans in place – just in case.
What constitutes a financial shock?
The following list is not exhaustive, but contains some of the major shocks that our clients have experienced over the years:
Death of a loved one
Sudden poor health
How to second guess the future and be prepared for a personal financial shock.
The thought of being hit with a major negative event that could affect your finances, can keep anyone awake at night. However, the prospect of something expensive and beyond your control happening, becomes less threatening if you’re properly prepared.
We have just experienced a worldwide pandemic – an enormous financial shock that will have repercussions into the future. Some people have been very badly affected financially, but those with more secure financial arrangements not so much.
And now we have a war on our doorstep in Europe.
Perhaps a good way to focus the mind on financial resilience is to consider what you should do if things get worse, or these things happen again in the future.
Here are some ideas to consider:
1. Keep an easily accessible emergency fund in cash.
Cash accounts, will help you the most in a crisis. You’ll want to turn to these resources first because their value doesn’t fluctuate like long term investment portfolios and so you will never incur a financial loss or penalty.
You should think about having at least 3-6 months normal expenses in cash, together with any funds that you anticipate spending in the next 12 months.
If you are retired, we recommend that you have 18 months-2 years’ income set aside in cash at all times, so that you never have to draw down from invested assets in an emergency.
2. Make a Budget
If you don’t know exactly how much money you have coming in and going out each month, you won’t know how much money you need for your emergency fund.
And if you aren’t keeping a budget, you also have no idea whether you’re currently living below your means or overextending yourself. A budget is not like a parent—it can’t and won’t force you to change your behaviour—but it is a useful tool that can help you decide if you’re happy with where your money is going and where you stand financially.
Taking the time to understand your income and your expenses, will ensure that you can spend within your means and manage your lifestyle expectations.
3. Manage and Minimise Your Monthly Bills
You might not have to do it now, but be ready to start cutting out anything that is not a necessity. If you can get your recurring monthly expenses as low as they can be, you’ll have less difficulty paying your bills if money becomes tight.
Start by looking at your budget to see where you might currently be spending more money than necessary. For example, are you paying too much for your banking arrangements or energy because you haven’t shopped around for a while? Are you paying £30 a month for a landline you rarely use? And what about your insurance payments – can they be reduced? Can you get a better credit card deal?
Perhaps set a date each month to review your payments, credit card bills and direct debits etc – it is surprising how these can creep up and even keep going when accounts have been closed!
If you have credit card debt, the interest charges you’re paying every month can be significant. If you make it a point to pay down your credit card debt, you will reduce your monthly financial obligations and put yourself in a better position for saving. Getting rid of interest payments frees you to put your money toward more important things.
If you can pay off your mortgage sooner, then this will all help, but at the very least, understand how your lender will treat you if you have to stop or suspend payments in an emergency.
Ensure that you are planning for the future – put away money today for savings goals, including retirement, leisure, and emergency purposes in the future.
We recommend that you take advantage of all the efficient savings vehicles like ISAs and pensions and put away AT LEAST 10% of your net income each month, BEFORE you spend on anything else.
Having money to fall back on at all times will make you feel more secure and provide the important safety net you may need if something unexpected happens.
6. Check Your Insurance Coverage
No one likes paying for insurance, but when financial shocks occur it is the best thing in the world!
Buying insurance is just a way of transferring the risk of a shock to someone else – the insurance company.
In the event of premature death, disability, serious illness, loss of job, loss of income etc, an insurance policy can provide the funds to enable the beneficiaries to maintain their current lifestyle, at least until they are able to come to terms with the shock and make future plans.
At Magenta we will help you to check whether your current policies are sufficient, too expensive or not enough.
Asset cover is important too and should be regularly reviewed – insurance for your car, house, valuables etc should be kept up to date and costs monitored closely.
7. Explore Ways to Earn Extra Cash
Everyone has something they can do to earn extra money, whether it’s selling possessions you no longer need/use, babysitting, freelancing, or getting a second job. The money you earn from these activities may seem insignificant compared to what you earn at your primary job, but even small amounts can add up to something meaningful over time.
Besides, many of these activities have side benefits: You might end up with a less cluttered house or discover that you enjoy your side job enough to make it your career.
8. Keep Up With Routine Maintenance
If you keep the components of your car, home, and physical health in top condition, you can catch problems while they’re small and avoid expensive repairs and medical issues later.
It’s cheaper to make regular trips to the dentist and have cavities filled than to get root canal work when the pain gets worse. It’s easier to clean out gutters regularly rather than have them overflow into the house causing damp issues and it’s better to eat healthy and exercise than end up needing treatment for diabetes or heart disease.
You might think you don’t have the time or money to deal with these things on a regular basis, but they can create much larger disruptions of your time and finances if you ignore them.
9. Take Stock of Your Non-Cash Assets and Maximise Their Value
Being prepared might include identifying all of your options. Do you have frequent flyer miles you can use if you need to travel? Do you have extra food in your house that you can plan meals around to lower your grocery bills (or even stockpile in the event of a serious crisis?) Do you have any gift cards you can put toward entertainment? Do you have rewards from a credit card that you can convert to gift cards or air miles or experiences?
All these assets can help you lower your monthly expenses, but only if you know what you have and use them wisely. Knowing what you have can also prevent you from buying things you don’t need.
10. Take advice and plan, plan, plan.
The old adage goes – fail to plan, plan to fail.
This is particularly important when considering financial shocks. At Magenta, we provide all clients with a personalised lifetime cashflow forecast which takes account of everything they own and owe as well as projecting all future income and the cost of their desired lifestyle.
We also look at various “what if” scenarios like premature death, disability, loss of income and capital etc to see how resilient they are to financial shocks.
We also factor in the good shocks like cash windfalls, to see if they will have enough money and whether they can afford to make gifts to family, worthy causes etc. We also help clients decide what to do with the money to enrich their lives and ensure future security for their families.
Armed with this information, clients tell us they feel much happier and more secure in the knowledge that all bases are covered, just in case something happens out of their control.
Life is unpredictable, but if there’s anything you can do to stave off disaster, it’s to be prepared and careful. With the right preparation, you can turn a potential financial tragedy into a merely temporary setback.
If you feel that you would like to see how resilient you are to financial shocks do call us for a friendly chat.