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5 practical ways you can make yourself more resilient to financial shocks

In October 2020 the Financial Conduct Authority (FCA) surveyed more than 22,000 UK consumers about their attitudes towards managing their money, the financial products they have, and their experiences of using firms offering financial services.

Among their findings, the FCA found signs suggesting that many more adults might find it difficult to cope with a systemic financial shock.

So, what can you do to ensure financial resilience in difficult times? Here are five simple suggestions you may wish to consider.

1. Reduce or eliminate expensive debt

If you’re in the fortunate position of owning all your assets outright, you’ll benefit from a strong financial cushion and increased security. If you already own your house or car you don’t have to worry about losing them if your income is reduced, or you lose your job.

Unfortunately, most of us aren’t in this enviable position, and reducing your personal debt can seem daunting.

Take a strategic approach to paying off your debt. Start with the debt charging the highest interest rate and then work from there. As the cost of your debt reduces over time, your work will pay off and you should find yourself in a stronger financial position, with more cash in the bank.

2. Build and maintain a rainy day fund

You may have a pot for saving towards a holiday, a car or a new piece of furniture, but what about saving for the unexpected?

A rainy day or emergency fund is an important buffer when life throws you a curveball. By taking the time to build up your emergency savings, you’ll be in better shape to weather financial setbacks.

Usually, a savings pot equivalent to three to six months’ income is advisable. This way, if you lost your job without warning, you would have the funds to cover everyday expenses like mortgage payments, food, and household bills.

3. Get the right level of protection

One way you can ensure your resilience to unexpected disruption is by making sure you and your family have the right protection in place.

This can help replace your monthly income if an unexpected event affects your ability to work such as an accident or illness. Protection you may wish to consider includes:

Critical illness cover

Cancer Research UK say that 1 in 2 people in the UK born after 1960 will be diagnosed with some form of cancer during their lifetime.

Critical illness cover will provide you with a cash lump sum if you’re diagnosed with a serious illness such as cancer, a heart attack, or stroke. It can offer peace of mind when the worst happens.

Putting the right protection in place means you’ll have capital available to cover private medical expenses, replace income, or pay your mortgage or rent payments if you have to take an extended period off work.

Income protection

A 2020 YouGov and Open Money study found that one in five UK adults have no immediately accessible savings. This means they would struggle to pay their mortgage and other bills if they experienced a short-term disruption to their income.

This may be because many people believe that the state will look after them, but Statutory Sick Pay will only pay a maximum of £95.85 per week and is only payable for 28 weeks.

Income protection can make sure you continue to receive a monthly income if you’re ill or injured in an accident. It pays out a regular income until you are well enough to return to work.

If you’re self-employed, protecting your income is even more vital. If you have a family or a mortgage to pay, income protection can offer peace of mind that you and your family will be protected if you’re unable to work for a period of time.

When you work for yourself, you’re more susceptible to an income shock than an employee might be. You could be too ill to work for a sustained period or injury could prevent you from being able to work, potentially leaving you with no income at all.

There are many types of protection, so it’s a good idea to seek professional advice from an independent planner to find the right cover for you.

4. Know what you’re spending your money on

Having a clear idea of where you’re spending your money and how savings and debt influence your financial resilience can help you take control of your financial situation.

Some costs, like your mortgage, food or travel, might be fixed. But other expenses may be “discretionary spending” and is expenditure you have a choice about. Understanding how much of your money is spent on luxuries rather than essentials is key to building your financial resilience.

Also, beware if you’re buying these “luxury” items on credit as this can easily end up turning into a fixed expense rather than an optional one, as you’ll have to factor in your regular repayments.

It’s easy to sign up, subscribe, and continue to pay for services just because you’re used to doing so. Take the time to go through your regular direct debits and make sure you cancel any subscriptions which are no longer serving you.

5. Have a financial plan

Setting clear financial goals will help you stay focused on what matters and set you on the path to becoming more financially resilient. Creating a financial plan and sticking to it is one of the most effective ways to build long-term resilience.

Ask yourself what you want to achieve and why a financial plan matters to you. Having a clear goal will help you form and stick to your plan, which will help you grow more financially resilient.

Get in touch

We can help you put a financial plan together that helps you to reach your goals – whatever happens along the way. Email hello@sovereign-ifa.co.uk or call us on 01454 416653 to find out more.

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