Could your family handle a financial shock? 3 essential ways to prepare

Life is full of surprises. Some are pleasant and some are not. Whether it’s a sudden job loss or a costly home repair, if you’re not ready for the unexpected, you could find yourself out of pocket.

The key to navigating these challenges could lie in proactive preparation.

After all, building a robust financial safety net isn’t just about saving money, it’s about securing peace of mind and ensuring your long-term financial wellbeing.

Let’s explore three essential steps you can take to build a secure financial safety net for yourself and your family.

1. Put an emergency fund in place to act as a buffer

One of the first things you can do to help prepare yourself for a financial shock is to build up an emergency fund. Having a reserve of easily accessible money could help cushion the blow of lost income or unforeseen expenses.

Though the standard advice says to have 3 to 6 months’ worth of essential living expenses set aside, this isn’t a one-size-fits-all figure. Your personal circumstances, such as job security and the needs of your dependents, could influence the size of your emergency fund.

You can use a cashflow analysis to work out the most suitable amount of emergency savings you need.

This is a carefully calculated amount based on your individual needs and projections of potential expenses and could include:

• Housing costs – Rent or mortgage payments, property taxes, and essential home insurance
• Utilities – Electricity, gas, and water
• Food – Groceries and basic household supplies
• Transportation – Costs to get to work or for essential appointments
• Healthcare – Essential prescriptions and other medical necessities
• Debt repayments – Minimum repayments on debts
• Childcare – If necessary for you to work.

When calculating your base figure, you would typically exclude non-essential spending like entertainment, dining out, subscriptions, and discretionary shopping.

2. Explore protection options for specific risks

While an emergency fund can provide immediate relief for unexpected costs, it’s also important to consider longer-term protection options. These could include income protection and critical illness cover.

• Income protection can help cover a portion of your income over the long term if you’re injured or ill and cannot work.
• Critical illness cover can provide a lump-sum payment upon the diagnosis of a serious illness or injury covered by the policy.

Having the -most appropriate protection in place can help provide crucial financial support in challenging times. When combined with an emergency fund, a protection policy could help ensure you don’t need to prematurely withdraw from investments or, for those over 55, deplete your pension funds to cover costs.

Both could significantly affect your long-term growth and potentially jeopardise your future financial security.

Combining income protection and critical illness cover could offer you the most comprehensive financial support should the worst happen, but the choice of which policies you need and how much cover you should get is personal. This is something I can help you with.

3. Pay off as much high-interest debt as possible before a financial emergency can occur

While life is often unpredictable, it could help to have high-interest debts paid off in the event of a financial emergency.

Having to manage high levels of debt during a financial crisis can exacerbate the effects of a financial shock. Working on ways to manage and reduce your debt can help with this. More than that, it could be useful for your long-term financial security.

Here are a few ways to go about managing your debt:

• Prioritise high-interest debt. Focus on paying down debt with the highest interest rates first to minimise long-term costs
• Consolidate your debt. If it’s the – most appropriate move for you, consider consolidating multiple debts into a single loan with a potentially lower interest rate and monthly payments.
• Negotiate with your creditors. If you anticipate any difficulty making payments, contact your creditors before you’re unable to pay. They may be willing to work out a temporary arrangement to help.

Remember, effective debt management can free up cashflow, making it easier to build up your emergency fund and reducing your financial obligations. This can help when you need to absorb unexpected expenses.

I can help you build up your financial resilience

Remember, preparing for financial shocks isn’t about expecting the worst out of life. Rather, it’s a way to maintain a positive and productive financial future.

Building a robust emergency fund, regularly reviewing your protection needs, and considering debt management strategies are just a few of the ways you can prepare your finances for life’s inevitable storms.

Together, we can work out a plan that works for you and your family, taking into account your personal needs and circumstances.

Email Marnel.Stafford@fosterdenovo.com or call 07305 970959 or 0207 469 2800 to find out more about how I can help you.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

The Financial Conduct Authority does not regulate cashflow planning or debt management

Note that financial protection plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.

Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.