COMMENT:

Do you have a financial safety net? What happens to you if you lose your job or can't work due to sickness or disability?

Most of us think it won't happen to us, or in the case of disability that ACC will pay our bills. Too often that isn't the case.

The answer isn't to put your head in the sand. It's to set up a safety net and build financial resilience. This can significantly reduce stress and anxiety, says Jessica Niemack, founder of The GeneNow Financial Literacy Trust.

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Financial safety nets are something to fall back on when the unexpected happens. They come in a variety of guises and may not be simply cash savings. A safety net might be insurance, although cash AND insurance is better than one or the other). For some cultures it's family or whānau who will see us through a tough spot financially.

Whatever it is, you're going to need money to survive. The Commission for Financial Capability (CFFC) says only 55 per cent of us could come up with $3000 if needed. That's not going to last very long if you're out of work. If you're among the other 45 per cent, things are worse.

Being financially prepared for what life throws at us really can free up your headspace.

Put words to your worries

Verbalising your financial worries gives your financial anxiety a voice, says Niemack. If there is something holding you back from setting up a safety net it can be discussed with a budget adviser, at a MoneyMates self-help group, or with your family around the table, she says.

Have a plan

The single most important thing you can do to get through a financial storm is have a plan, says Niemack. That plan outlines where you are now and what you want to achieve to become financially resilient.

Set up a rainy day fund

Having money set aside can help reduce stress in a personal financial crisis. Research for ANZ's 2018 Financial Wellbeing report, released at Money Week this year, found that having a savings buffer of at least $1000 was associated with higher financial wellbeing.

Having cash is better than knowing you'll have to take out a loan or pay with a credit card to pay for basics in times of financial stress. As a rule of thumb, three months' worth of expenses in a rainy day account should get you through most short-term crises. By the end of three months most people will be back in work or will have downsized some of their financial obligations.

Start small

If three months' money sounds huge don't let it put you off getting started. Even a few hundred dollars in the rainy day account is better than none at all. Likewise, building it by $5 or $10 a week is better than nothing.

Niemack has a good point when she says if you start too big the result is often failure. It's like trying to cut chocolate, alcohol and fried food out of your diet in one go. When someone tells her they're going to save $100 a week (or month) to kick start their rainy day savings, she suggests they start putting away a smaller sum. Otherwise they'll end up dipping into the account for everyday emergencies.

Once they're used to saving a small sum of money they can increase it, she says.

Beware of dipping into your rainy day account for irregular, but expected expenses such as fixing the car or paying for holidays. These aren't emergencies and can be planned for financially. Once you have the main rainy day fund, keep saving for a buffer to cover these one-off expenses.

Get insurance

If you can afford a coffee, false eye lashes, or to go out to dinner you can afford insurance, says retirement commissioner Diane Maxwell.

Income protection insurance and related insurances such as trauma/critical illness insurance can cover your living expenses if you can't work. ACC is another type of insurance covering your income, but only if you have an accident.

Few Kiwis realise, however, that they're more likely to be disabled through illness than accident, and that's not covered by ACC.

Think outside the box

If you lose your job are there ways you can make a living short term until you can get a job.

It could be consulting, doing short one-off projects, or even joining the gig economy. Be aware, however, that many of these jobs will pay less than you're used to – especially in the gig economy where you may be earning less than minimum wage.

The CFFC's Tom Hartman says another option here is to hunt around the house for stuff to sell. Most of us have thousands of dollars' worth of things collecting dust.

Stress test your financial situation

Once you've worked out what you could live on for the first few months without a job, do a dry run.

Live within this budget for a few months.

Whatever you choose, make a plan and do it now.