From ensuring your loved ones are protected from sudden shocks with insurance, to earning interest on both savings and current account balances, we ask the experts how best to prepare for a financially volatile year.
The cost-of-living crisis is testing many of us to the max. With household bills rising and wages not keeping pace, it is harder than ever to make our money stretch until the next payday.
But as well as making day-to-day living difficult, rising inflation can affect our financial resilience, that is, our ability to cope with any sudden financial shocks that life might throw at us.
Whether it’s the car breaking down, unexpected sickness or job insecurity, a sudden blow can knock finances badly off course and create a downward spiral, unless you already have savings or insurance in place to help.
“Maintaining financial resilience is key to managing personal finances through this period of instability. But, unfortunately, many Brits are not equipped to cope,” says Stacey Lowman, head of employee wellbeing at Claro Wellbeing, a financial service and coaching app.
“This means that when times get tough, money worries grow and have a devastating impact on people’s lives.”
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Focusing on building up your family’s financial resilience will help you to survive difficult times in this coming year. Here are some ways to do it.
Start with an emergency fund
Building up a ‘rainy day’ fund means that you are less likely to get into debt if an emergency expense occurs. Experts suggest having six months of expenses in easy-access savings, but if this seems like a daunting figure it’s best to focus simply on what’s possible.
Regular savings accounts can be a good way to build up these funds. These types of accounts are designed for those who want to put away a small amount of money each month and receive good rates for it, and are often attached to your current account.
By setting up a monthly direct debit into a regular savings account, you can ensure you are building up a separate savings fund without even noticing.
Consider insurance cover
Paying out for insurance can be galling, particularly when money is tight, but insurance can provide protection against unexpected events that would otherwise knock you off course financially.
Cover to consider includes life insurance or critical illness cover, which can pay out if you become sick, or support your family in the event of your death. Not everyone needs this cover, as some people have life insurance through work, or have other arrangements that could help with unexpected costs.
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Emma Watson, financial planning expert at financial adviser Rathbones, suggests going through your own finances and working out what would happen to your family if you were unwell and unable to work or died unexpectedly.
“In some instances, people get life insurance through their employer, but they may not know if this is enough. If you have dependents or anyone relying on you financially, it may well be worthwhile considering taking out an insurance policy to give you peace of mind,” she explains.
Budget for wants as well as needs
Being financially resilient means planning for the long term, so it is key to make your budgeting sustainable, says Margot De Broglie, from financial education platform Your Juno. She explains that relying on willpower to avoid spending is doomed to fail.
“Make sure your budget factors in spending money on your favourite things. This will keep you motivated. Purely relying on willpower isn’t the way to go,” she says. “There’s no shame in spending money on yourself.”
Make a contract diary
Paying too much for your household bills will chip away at your financial resilience, so make plans now to reduce bills wherever possible. Mobile phones and broadband bills are places where you may be able to save despite rising inflation – especially if you are willing to move to a SIM-only contract for your mobile.
“Check when your contracts end for your household bills and mobile phones. Set yourself a reminder to check the new deals available when the contracts end so you can move to the next best deal. Don’t automatically let them roll on as you could be overpaying unnecessarily,” says Jessica Ayres, financial adviser, Timothy James & Partners.
Take control of your mortgage
Higher interest rates mean that many of us will find our monthly mortgage payments rise at the end of our current deals. Mortgages are a huge outgoing for most of us, so if they rise hugely this can really affect our resilience.
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Alice Haine, personal finance analyst at DIY investment platform BestInvest, says 1.8 million of us will come to the end of fixed rate deals in the next year.
“You might want to speak to a mortgage broker to assess the best product for your risk profile,” she says.
“While it is possible to lock in a new deal up to six months ahead, with so much uncertainty this might not be the best move as better rates could emerge within that timeframe – so get that review call in with your broker to weigh up the options.”
Whatever your personal finance position, you will be ahead of the game if you put these safety mechanisms in place now, at the beginning of the year.
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