Most of us know what it means to build resilience in the context of health and wellness: eat healthily, exercise regularly, get enough sleep and manage stress. But what does it mean to be financially resilient? Mthobisi Mthimkhulu provides some insight.
While you may have an adequate income and you could be brilliant at sticking to your budget, it’s still possible to be financially derailed by an unexpected expense. In very basic terms, financial resilience is the ability to bounce back after life throws you a curveball that impacts your income, your assets or both.
Thinking about financial resilience prompts us to consider some very uncomfortable “what if” questions. While we may not have control over these events, what we can control is how prepared we are in case they do happen to us.
Start by asking yourself some tough questions and then tackle the six key areas listed below to put yourself on the path to becoming financially resilient. If you do not feel equipped to navigate the journey by yourself, it’s a good idea to consult with an independent financial adviser.
1. Build up an emergency fund
Life doesn’t always work out as planned. Ask yourself: What will happen if I get retrenched or dismissed? Will I be able to get by if I fall ill and run out of paid sick leave? How will my finances be impacted if my marriage ends? What if my car breaks down and I don’t have a service or maintenance plan?
This is where an emergency fund comes in. You can think of an emergency fund as a general financial safety net to protect you against adverse events that are not covered by other financial products, like insurance or your medical aid. An often-quoted rule of thumb is to try and save up at least three months’ worth of income.
It’s a good idea to keep your emergency savings in an easy-to-access, low risk investment, such as a money market fund. This will allow you to potentially earn a better return than in a bank account, but won’t result in capital losses if you have to withdraw at an inopportune time. It may take a while to build up your fund, but keep at it.
Ideally, you shouldn’t dip into your emergency fund for other purposes, like recreation. Rather create a separate account to save towards planned short-term expenses (such as a holiday or a car) or long-term expenses (such as your children’s education – see point 6).
2. Make sure you’re properly insured
How will I replace my income if I become temporarily or permanently disabled and unable to work? How will I cope financially if one of my loved ones passes away? If something happens to me, will my family be taken care of?
While an emergency fund caters for most short-term bumps in the road, you need insurance to cover you for serious situations:
- An income protection policy (sometimes called “disability income”) will pay you an income if you become temporarily or permanently disabled. Make sure you understand the terms and conditions of your policy, for example the waiting period and what percentage of your income is covered. Disability insurance also comes in the form of a lump sum benefit that is paid out if you become permanently disabled and are unable to work.
- Critical illness or dread disease cover pays out a lump sum benefit if you are diagnosed with one of the illnesses listed in the policy terms, such as a stroke, cancer or a heart attack. The difference between critical illness cover and disability lump sum cover is that the latter requires you to be unable to work, whereas critical illness cover only requires a diagnosis – you may very well be able to continue working afterwards. These policies can help if your medical aid doesn’t cover your treatment in full.
- A funeral policy will cover the cost of a funeral for yourself and/or your family members. The death benefit on a funeral policy is usually paid out much quicker than on a normal life insurance policy so that the necessary arrangements can be made without delay.
- Life insurance caters for the longer-term needs of family members in the event of your death and can be used to settle debt or to provide for the loved ones who survive you.
- Car and household (building and contents) insurance ensures that you don’t have to pay for accidents and other unforeseen events out of your own pocket. Remember to read the fine print, like how much your excess payment on a claim would be.
While it’s important to have adequate cover, you also need to make sure you are not over-insured and wasting money on unnecessary premiums – one funeral or life insurance policy is usually enough.
3. Join a medical aid and take out gap cover
Where will I find the money to fund a medical procedure that is not covered in full by my medical aid?
With medical inflation soaring, it’s a good idea to, at the very least, contribute to a hospital plan through a medical aid. It’s important to note that there can be a substantial shortfall between what your healthcare provider charges and what your medical aid covers. Gap cover is intended to make up that shortfall and may also cover you for certain costs not often paid by your medical aid, such as prostheses.
4. Manage your debt
If you’re not prepared – or not financially resilient – you may find yourself having to resort to taking on debt in order to pay for an unforeseen expense. If you do find yourself indebted, it’s important to carefully manage your repayments so that you don’t fall behind and end up damaging your credit score or rating in the process. A bad credit rating will make it harder for you to get access to credit in the future, for example if you want to buy a house. Prioritise settling the debt that attracts the highest interest rate first and if you’re struggling to meet all your obligations, contact your creditors and try to renegotiate terms to find a workable solution.
5. Don’t let your retirement savings plan fall by the wayside
How will I survive in retirement if I do not have enough money saved?
When “life happens” and we’re under financial pressure, retirement savings contributions are often the first thing to go. If you have to stop contributing for a while to get back on your feet, it’s not the end of the world. However, prioritise saving for your retirement and avoid cashing in when you change jobs, as you land up having to start saving all over again – and miss out on compound growth.
6. Plan for long-term expenses that may have a big impact on your budget
How will I afford my children’s high school and/or university fees?
The problem with relying purely on your salary to fund education is that the cost of education grows at a higher rate than the average salary. This means that over time, you’ll need more and more of your salary to pay for your children’s education. Even if you missed the opportunity of starting to save early, you can still greatly reduce the impact that fees will have on your budget in the future by starting now.
There are different ways to save for education – for example through education policies, endowments, tax-free investments or unit trusts. The best solution for you will depend on your unique circumstances.
Financial resilience is a continuous journey
Achieving financial resilience is not a once-off project; it requires ongoing diligence. It is also not reserved for wealthy people – anyone can become resilient by developing the right habits and taking a holistic approach. Being resilient in the context of health and wellness requires time, patience and commitment; the same applies to financial resilience. Do not be discouraged if you’re not quite there yet – just take it one step at a time.