3 things you should do to make yourself less vulnerable to financial shocks

The economic crisis caused by the pandemic and the subsequent lockdowns has had a significant effect on millions of Brits. According to the BBC, around two million Brits were furloughed at the end of October 2020, and many more have lost their jobs.

If you’ve felt the financial impact of the lockdowns, it might have made you consider how resilient your finances actually are. If you want to make yourself less vulnerable to financial shocks in future, here are three things you should do.

1. Keep an emergency fund

When disaster strikes, it’s important to have some money on hand as a buffer. However, according to a survey by the Yorkshire Building Society, reported in Money Expert, 26% of Brits don’t have enough savings to last them one month if they suffered a financial shock, such as losing their job.

With this in mind, one of the best ways you can keep yourself safe from unexpected financial shocks is by keeping an emergency fund. Keeping such a fund can help you cover your expenses while you get back on your feet if you face a sudden reduction in income.

Most experts recommend that building an emergency fund of between three and six months’ worth of expenses is a good amount to keep yourself safe from financial shocks.

However, if you are self-employed or work in a field that is particularly at risk during a financial downturn, you may want to consider keeping a larger fund.

If you don’t already have an emergency fund, now is the time to start building one. You can start to build a fund by finding ways to reduce your expenses and putting aside that money for when you need it.

If you’re struggling to find areas to save money in, you may benefit from speaking to a financial adviser. An adviser can help you build up an emergency fund so that you can rest more easily if disaster should strike.

2. Consider getting Income Protection insurance

Health issues can strike without warning and, if you’re unable to work for a period of time, it could have a disastrous impact on your finances.

If you’re concerned about being unable to work due to illness, you may want to consider Income Protection insurance.

If you’re unable to work due to accident or illness, Income Protection will pay you a monthly amount to cover a portion of your lost income. Typically, this is around 60% of your normal salary.

Income Protection also typically has an ‘excess’ period before you receive any benefit. This period is usually between one to four months, so depending on the length of your excess period that you agreed with your insurer, you will have to be off work for this long before you receive any payments.

According to market data from the Association of British Insurers, reported in FT Adviser, the most common claims for Income Protection are:

• 30% – Musculoskeletal (disorders affecting muscles, bones, and joints)
• 9% – Mental health
• 7% – Cancer

The fact that mental health problems were the second largest cause of claims should be an encouragement to consider Income Protection insurance even if your physical health is fine.

A recent study, reported in the Telegraph, has warned that mental health problems are surging in the UK, thought to be due to the negative psychological effects of the second lockdown. This is why, even if your physical health is fine, you may still want to consider Income Protection.

Whatever your age or health, Income Protection can provide you with peace of mind knowing that you can keep your head above water financially if you are off work for an extended period because of illness or injury.

3. Diversify your investments to mitigate risk

The initial lockdown in March caused a 25% drop in the FTSE 100, according to the Telegraph, with some share prices falling dramatically. Some of the worst affected were in areas such as aviation and housebuilding, which had to halt operations.

If you want to keep your finances safe from financial shocks, you should consider diversifying your investments. This helps to mitigate the risk to your money by ensuring that you’re not overexposed in any particular area.

For example, if you only invest in airline stocks but airports are forced to suspend flights, your shares will likely fall in value and the total value of your investments could reduce by a significant amount.

Diversifying your investments can help to protect your wealth from economic disruption by minimising the impact on any particular area.

Get in touch

If you’re looking to re-organise your finances to help protect you from financial shocks, we can help. Email enquiries@prosserknowles.co.uk or click here to request a call back from one of our advisers.