Here’s how to make sure your finances could withstand a shock
Chris Skelton / Stuff
How would you survive if your income was reduced or lost in the short, medium or long term?
OPINION: As we watch the Covid resurgence unfold right across Tasman with the new Delta variant, I wonder about the lessons we’ve learned from the last year, since the pandemic hit our shores.
We know this has highlighted to many the need for financial resilience and security. But has this actually translated into a change in our financial behavior?
Certainly for those in sectors such as hospitality, tourism or retail – where many people have lost their jobs or had reduced hours due to closures, border restrictions, economic uncertainty and market – the need for financial resilience and security has become daily. reality.
For the rest of us who were luckier and didn’t suffer a financial loss, we certainly paused and thought about how we would survive if our incomes were reduced or lost in the short, medium or long. term.
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A year later, what could or should you have done to be more financially resilient and have financial security?
The first thing would be to consider having a financial buffer. It means understanding how much money you need to put aside in the event of a problem, so that you can pay your basic bills and living expenses.
It means things like understanding your essentials versus your good guys. This includes little things like remembering that if you need to stop subscriptions like Netflix or Sky, there is often a delay in the cancellation notification. Not all costs can be turned off quickly.
Once you’ve figured out what your core costs are, you need to decide if you need the tampon for one, two, three months, or even longer.
Most recommendations are for three months. Saving from a reserve fund takes time, especially if you don’t have a lot of money left across paychecks, which is the reality of many households, who spend what they earn every week. And this is true for those with low and high incomes.
In fact, studies show surprisingly high wastage in high-income households, which often struggle to meet their commitments. This is mainly a direct result of poor financial behavior and discipline. Sometimes low-income households have better financial resilience because they are more aware of the need for good financial behavior.
When considering financial resilience and security, here are some things to consider:
- Understand what your core costs are and make sure you have a reserve fund to cover these costs for a period in case your income is reduced.
- Stay on top of new costs and assess what you really need. It means reviewing what you spend your money on. It’s easy to add another subscription, and before you know it, you’ve added a third streaming entertainment service. It’s easy to hear about a new great movie or series, subscribe to the channel, and then forget to cancel for months or even years.
- Protect your assets. This includes making sure you have the right insurance. Come claim the time, it will be the best buy you ever made.
- Stay on top of your debt, especially short-term debt. It can end up being very expensive if you don’t pay for it every month. Keep in mind that these Buy It Now programs can add up, especially if you have more than one moving at a time. These can commit your cash in the future.
- Save every month if you can. This allows you to keep your buffer intact in case something goes wrong, but gives you a choice if something does happen in the short term, like an expensive WOF or a crashed laptop.
- Take a look at your financial goals and try to focus on building assets rather than consumables. Assets add long term benefit to your life.
I learned my good financial behavior as I got older. I would certainly have liked to know 20 years ago what I know now.
But it’s never too late to change the way we think about our money and our personal finances.
Having focused the past few years on good financial behavior – or in layman’s terms, respecting value for money – the best advice my financial advisor has given me is to have a fixed amount of money. as minimum float in the household bills account and in my personal expense account.
These give me the peace of mind that if something goes wrong there are reserves in place so that I don’t have to think about how I’m going to finance an unforeseen cost, and also allow the invoices are “lump sum”.
My challenge for you is to start building your financial resilience – one payday at a time. With Covid so close to us, who knows when we might need a tampon to help us.
– Katrina Shanks is the Managing Director of Financial Advice NZ.