We are all concerned about our physical health during the spread of Covid-19, especially those who have medical conditions. Many of us are also concerned about our mental health with all the worry about our loved ones, loneliness, relationship issues from enforced isolation and lack of focus and routine. Worry and distress have been compounded for many with the addition of financial pressure as a result of the impact on businesses and the economy.
Developing resilience in both your physical and mental health is certainly helpful. Living a healthy lifestyle means you have fewer underlying health conditions as you get older and learning to manage your response to stress means you will have the tools to cope better with isolation and worry. Financial resilience means your finances can withstand a set back as well.
As Financial Planners, during our conversations we often talk with clients about resilience. We might ask what would happen if there was a shock to your finances. We use cash flow modelling software to look at “what if” scenarios; what if you get ill, what if you died, what if you lost your job, what if there was a recession? I think we might just be living through the biggest “what if” scenario of our lifetime.
Unfortunately for many people financial resilience will be a dream right now and without the comprehensive action the government has taken there would be a great deal more hardship. The hard truth is research shows many families live a matter of days away from the breadline with nothing in place to survive a shock to their finances.
So, what do we recommend to our clients to help create financial resilience?
The simple fact is many people, even those who earn a good living, do not make provision for emergencies. We recommend people keep 3 to 6 months expenditure accessible for emergency cash. This is money that you would keep on deposit, not necessarily in your current account, but certainly accessible within a month. You would not invest this money, look what would have happened if you needed it right now! Investment is only a long term option. Emergency cash is useful if you need time to find new employment. It means you have money for emergencies such as car and house repairs. It helps you feel in control which is also really good for your mental health. Otherwise, you will be at the mercy of credit cards and overdrafts. Relying on credit is stressful and can become an expensive bad habit.
Protection and Insurance
While we are working and have huge responsibilities, perhaps a family to feed, a mortgage to pay, car loans and other financial commitments there would be a big hole in our finances if anything went wrong. Say for instance you had a serious health crisis. Your emergency cash would not last long in this situation. Part of our “what if” planning looks at how the gap can be filled with insurance. The starting point: what staff benefits does your employer offer? If you are self employed this is a very important conversation with your financial planner because the safety net is all down to you. People assume that the state will step in. It will not support the lifestyle most of us are accustomed to, nowhere near. If you are lucky enough to have a good employee benefits package you might not need as much insurance. Some employers offer death in service schemes, but statistically you are more likely to suffer from a health condition than actually die while of working age. The level of sick pay you are entitled to is a more important detail. You need to check what your employer offers because it might not be long before you are reliant on statutory sick pay. There are several types of insurance products that can either replace lost income or provide a lump sum. It’s not as easy as usual at the moment to get insurance as many companies are cautious about insuring those with potential symptoms of Covid-19. We would recommend you seek advice on this if you want to start a policy in the near future.
When we complete the research for a financial plan, quite a lot of the work is done by you the client. The best plans have a detailed analysis of income and expenditure, because it is everyday decisions about how you use your resources that ultimately mean you have control over your money. When you have no emergency cash it means your money has control over you. If you are lucky enough to have money coming in and you’re probably not spending as much as usual right now, you might be in a position to create a cash buffer.
Isn’t it fascinating how our spending habits have changed overnight. There is no browsing, no impulse buying, some might say no frivolity at all. I’ve noticed how much we as a family are spending on food, this was hidden before in small spends in café’s, takeaways, school dinners etc. Now I can see it all in once place as we are all eating at home so everything has been bought from one or two shops. It's a far bigger expense than I realised. On the other hand I have also become more conscious of waste because I can’t just pop out for more. Using up leftovers for lunch and making sure we are careful about using food before it goes out of date will hopefully become more of a habit for everyone. We have saved so much money on transport and we probably won’t get a holiday this year. It will be missed but it’s not essential is it? I think the point I’m making is this situation has shown us how precarious everything is and perhaps it’s more important to skip a holiday one year in order to create an emergency cash buffer? Maybe, those who are lucky enough to continue earning through this period can do something wise with the money saved to create more financial resilience.
Another aspect of financial planning which forms part of any “what if” scenario is to make sure you have your legal affairs in order. For most of us this means an up to date Will. A Lasting Power of Attorney is also useful, but realistically due to the expense most people do not consider this until they are older. Sadly, I’m sure it has crossed everyone’s mind lately to make sure they have a will. I know from talking to solicitors they are busy right now writing and reviewing Wills which is not easy in this time of social distancing, but it can be done. Lasting Powers of Attorney are very pertinent in this situation. There are two elements; firstly Property and Financial Affairs and secondly Health and Welfare. It gives an appointed Attorney the power to make decisions on your behalf. Many Attorneys will be asked to make difficult decisions in the weeks and months ahead. Without an LPA the process of managing someone’s affairs while they are unable to, can be very time consuming and costly.
This is a worrying time and not everyone will have the luxury of being able to use it to create more financial resilience, but if you are lucky enough to be able to take this time to reset your financial and legal affairs then use it. There is no time like the present.