In the last post, we looked at how to take action to prepare your finances for the future. This post looks at other steps you can take to ensure your financial security.
Critical illness is the second priority, in my opinion, after income protection. Your income is, without question, your single biggest asset. Add up your likely income, including cost-of-living rises for the rest of your career, and the total will be a lot of money.
You need to protect that asset, because as a singleton you’ve got no partner’s income to back you up if you can’t work due to an accident or illness. If you’ve got no other insurance cover, and don’t invest in life insurance or critical illness, DO put in place income protection.
If you’re able to afford both income protection AND lump-sum critical illness cover, then that’s the best of all worlds. And if you’ve then got the budget to get some life cover then so much the better, but build up your cover in that order.
Always think through the implications – what would happen to debt; what would my relatives left behind have to deal with if I was no longer around, what would I have to deal with if I suddenly became very ill or couldn’t work for two years? Look at what sick benefits are available at work and factor that in, and consider taking advice to make it easy for yourself.
Protect yourself with an emergency fund
Then, you need to get your emergency fund in place. Relying on your own income means that you’re going to need extra protection against Murphy. Dave Ramsey, who wrote the book “The Total Money Makeover”, talks about Murphy, as in Murphy’s Law, or Sod’s Law, as we know it in the UK.
Murphy’s Law states that “what can go wrong, will go wrong”, and Dave turns Murphy into a character. He says: “Murphy is much more likely to call on you (i.e. stuff is more likely to go wrong) if you don’t have a buffer or emergency fund in place”. If you want to protect yourself against things going wrong, try to get some savings together.
So, how much should you have? I normally say you should have three to six months net income, which is advice that’s generally aimed at couples. This is because it’s unlikely that both parties would lose their job at the same time, or be unable to work at the same time.
If you’re a singleton, I’d recommend you err towards the six months. Try to get six months' net income saved in an emergency fund, or even up to nine months. That’s an incredible buffer between you and the world, although I know it’s a big ask. Scraping together six months’ worth of net salary might even take you a few years, but it’ll be time well-spent.
Remember, this is an emergency fund, it’s not a holiday fund or a dipping-into-when-you-feel-like-it fund. Try to discipline yourself not to touch it while you’re building it, unless it’s a real emergency. You need to stick to this if you want to take things to the next level.
Help with building up your emergency fund
You can get help with budgeting and getting an emergency fund in place at udemy.com/learnhowtobudget. The idea is to surround yourself with a protective bubble of dosh, and it’s down to you to do it. The key to achieving this is discipline and budgeting every month. It doesn’t sound like fun, but the freedom that it brings you IS fun.
In the final post, we’ll look at planning for your retirement.