Hopefully, the last two posts have shown you the importance of having some kind of wealth protection in place. But what do you need to do to make sure you have the right plan?
Quantify the Risk
We need to start by understanding just how exposed we are to the potential loss of our income. And to understand that, we need to take a bit of a mental journey, and not a fun one either.
If you have a budget and know exactly what your costs are each month, then you can easily work out how long you could live for if your income stopped tomorrow. Just divide your current easily accessible money, say in bank accounts, premium bonds or other investments by the amount of your monthly costs and that’ll tell you how many months you could survive for.
If you’re aged 40 and you have a good pension fund, don’t include it, because unless you’re terminally ill or can prove that you’ll never work again, you probably won’t be able to touch it until you’re state pension age minus ten years.
What is the minimum you could survive on and still build for the future? This is up to you, so you may want to build in a Netflix subscription if you deem it essential. Come up with a monthly figure which you wouldn’t want to live on less than. Then use that (presumably lower) figure to work out how many months you could last. Chances are it’s probably a few more months, because you’ve dialled back your costs.
Obviously if you’re not here because you have unfortunately died, then the impact of that will depend on if you’re leaving anyone behind who is financially dependent on you. Run the numbers again – if you died and your partner didn’t, their income would presumably continue so factor that in. Then how long could they last if your income disappeared?
There’s no right number here, I just want to get you thinking about what the impact might be in a few different scenarios. Specifically, think through the financial impact of what might happen if one of you was still alive but couldn’t work, what would happen if one of you died and what would happen if you both died. This latter scenario is obviously the catastrophic one, but it still bears considering, and especially so if you have children or other dependents.
Maintain a Solid Emergency Fund
We’ve talked about an emergency fund quite a lot in other blog posts. An emergency fund is an amount of money, usually adding between three and six times your minimum monthly expenditure, which you keep ready and available as a buffer between you and whatever life throws at you.
This is an essential part of your wealth protection foundation because it does a couple of jobs. Obviously it shields you against having to either a) get into debt or b) take money out of a place where it’s growing for your future IF a largeish unexpected cost occurs.
So if the car completely fails its MOT and needs major work to get back on the road, you have the money there. Or if the boiler blows up then you can pay for that too. It isn’t a Christmas fund or a holiday fund, it’s an emergency fund and should be use for that purpose only.
The second thing it does is allows you to defer benefits from insurances, specifically income protection insurance, because you don’t need to insure the first few months’ worth of lost income – you have it covered.
And finally, it means you don’t even have to think about buying unemployment insurance. I really do hate unemployment insurance. Now, I confess it’s a while since I had anything to do with that scene, but I don’t think much has changed.
Unemployment insurance will pay out for a maximum of a year if you’re made redundant. It’s expensive for the level of cover you’ll get and notoriously difficult to claim upon. If there’s even a sniff of anything wrong with your employer at the time of taking out the cover, you won’t get it.
Or you’ll get the cover, but won’t be able to claim. Having six months of minimum monthly expenses in an emergency fund means you don’t need to waste money on crap insurance. If you’re worried about redundancy now – and I know many people are – the ideal scenario is that you should perhaps be building that emergency fund to even more than six months of cover.
Your emergency fund is your first line of defence against the universe throwing something unpleasant at you. Without it you’re unnecessarily exposed. If you don’t have one, it’s your first job.
If you have no money in the bank but you’re investing monthly into ISAs or Bitcoin or something, I suggest you stop that for a bit and build your emergency fund. The single most often-heard comment in my email inbox over the months of the Coronacrisis, was that people were glad they’ve got an emergency fund in place.
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