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Along with diet and exercise, getting ahead financially makes it onto many wish lists year in and year out. But a brighter financial future is likely to remain a pipe dream without a back-up if things don’t go to plan.
While setting goals is an important element in your overall financial plan, so is having a financial safety net. Whether you are aiming to save more, spend less or reduce debt this year, your best-laid plans could fall in a heap if you are not prepared for financial setbacks or unanticipated costs.
Putting a financial safety net in place does not come down to any single measure. Rather, it’s a comprehensive approach to risk that’s designed to protect you and your family’s financial wellbeing, come what may.
The first line of financial defence for households is to have some money tucked away in a ‘rainy day’ fund for emergencies and unexpected costs. If you are living from one pay day to the next and your hot water heater bursts or your car needs urgent repairs, the temptation is to whip out the credit card.
If you are only able to make the minimum monthly repayment you could be paying off that hot water heater for years to come. Whereas paying cash will save you money and make your financial goals that much easier to achieve.
It’s a good idea to keep your emergency cash in a separate account where it is readily accessible but won’t get mixed up with your everyday money.
Most experts suggest you aim to put aside three to six months’ living expenses. This can take a while to build up so one time-honoured strategy is to ‘pay yourself first’. Set up a direct debit from your primary bank account to divert part of your salary each month to your emergency fund.
Even with the best willpower in the world it can be difficult to save if you are weighed down with debt. When cash is needed for an emergency, households with high levels of debt are more likely to feel financial stress.
The good news is that with interest rates at or near their historic lows, there is no better time than the present to tackle debt. Aim to pay down loans with the highest interest rate first – typically this will be your credit cards.
If you have a mortgage, aim to pay more than the minimum monthly payment. By keeping at least three months ahead of schedule you can build a buffer to provide some wriggle room with your lender if you experience financial difficulties.
With home loan interest rates typically much lower than rates for personal loans and credit cards, you might consider consolidating your debts into your mortgage. Be aware though that this will effectively turn a short-term debt into one that will accrue interest for up to 30 years, so aim to step up your home loan repayments at the same time.
No financial safety net is complete without adequate personal insurance. We tend to insure our car and our house before we think about our most precious possession, our health and our ability to earn an income.
Ask yourself how your household would cope financially if you had an accident or suffered a critical illness. Worse still, what would happen if you were to die prematurely?
While health insurance will cover some of your medical costs, it won’t pay the mortgage and food bills or take care of your family while you are unable to work. That’s where personal insurance comes in, to cover your life, total and permanent disability, trauma and income protection. It’s possible you already have cover for some of these through your superannuation fund, but it may not be sufficient.
If you would like to discuss any aspect of your financial safety net, please give us a call.