Happy New Year. Now plan for the worst. It's been a funny old 12 months, but we've all learned a lot of lessons.
My usual New Year articles are all about the positive stuff and how you can turn your year around. But after 2020, let's talk about preparedness. That includes being mentally prepared for curved balls, having savings, and taking out insurance.
Mental preparedness. Do you have a plan for the next time the world turns to custard? Unpredictable (black swan) events such as the Global Financial Crisis and now pandemic, hit us every 10 years or so. We can have personal black swan events such as divorce, or illness. Financial adviser Steve Morris of SW Morris & Associates has seen an upswing in couples separating after lockdown. This can be financially crippling. He recommends getting help from organisations such as The Parenting Place before the relationship ends up on the rocks.
Savings. Getting out of debt and building up some savings is essential if you want to ride out the next financial crisis. If you're constantly a few weeks from financial meltdown then this applies to you. It's hard, but you need to change your thinking and create a budget. People can and do turn their finances around. Use Covid-19 as the financial catalyst to get you started.
In an ideal world you need three to six months living costs (not income) squirrelled away. Providing you are still able to work and willing, most people will find a job within that period.
The best tool for this is a budget. I know it sounds boring, but it's simple to write your first budget and the outcome can be truly life-changing. I follow a number of investing and get out of debt forums and see ordinary Kiwis celebrating cutting up their last credit card or beginning an emergency fund. Don't write it off. It can happen.
Morris also recommends using the free digital tools for personal cashflow forecasting from PocketSmith.
Insurance. The whole point of insurance is to cover yourself financially when unexpected events hit. That's insurance cover for your health, income, and property.
A variety of insurances can cover your income/outgoings. They include income/mortgage protection, trauma/critical illness, permanent disability, business interruption, medical, and life insurance (which often pays out if you're diagnosed with a terminal illness. Each covers different risks and it's a good idea to seek advice from a financial adviser. Everyone is covered by ACC for accidents, but you're more likely to become disabled by illness, and only qualify for Work & Income benefits if you don't have insurance. When insuring yourself, make sure you think about the non-working or lower-earning partner, says Morris. All too often a higher-earning spouse has to reduce hours to pick up parenting duties if the other spouse becomes ill, is disabled, or dies, says Morris. Trauma cover is very good in this situation because it usually pays a lump sum, he says.
Insurance is essential in our modern world, but no insurance policy is 100 per cent foolproof. Because the things you will claim on are unexpected, they could fall outside the policy wording.
AdvertisementAdvertise with NZME.
The insurance industry will hate me for saying this, but there are always sneaky get-out clauses. As we know now, many insurance policies exclude pandemic. Christchurch businesses that found themselves behind the cordon were told their business interruption insurance wouldn't pay out because the cause of their loss was the cordon, not damage from the earthquake.
Seek advice, says Morris. Insurances can be complex, and an adviser can navigate the issues. An example, says Morris, is business owners should ensure they have a modern lease that includes a "clause 27.5" ensuring rent is reduced if a cordon is in place.
Sadly, there will be more unexpected and extreme financial events in our lifetimes. Nothing is 100 per cent failsafe but preparing for the worst will help you survive.