2020 has been a year like nothing we’ve ever experienced before. A global pandemic turned the world upside down and it has shown everyone that your life, your income and your health can change in an instant. Uncertainty about the future and what that will look like continues, despite continued progress towards a vaccine.
This year has made it abundantly clear that you need a strong financial foundation in place, to make sure you’re prepared to protect yourself and your family if things don’t turn out like you had planned. Hopefully there won’t be another global pandemic in our lifetime, but at some point, life will get in the way and throw you a curveball.
If you don’t have your finances set up correctly and you aren’t in a place where you feel financially secure, it can cause a great deal of stress in your life. It can also affect your relationships and create a lot of undue pressure. By having a really strong financial base and all of the boxes ticked from a financial security perspective, you can feel comfortable and confident that you’re in a position to look after yourself and your family if things turn.
Below are three steps to help you set up a strong financial foundation to protect you and your family so that you can walk into 2021 feeling financially secure.
1. Cash Safety Net
Having no money in the bank is stressful. It leads to financial stress, anxiety, and can lead to bigger issues in your life. You need to build a cash safety net to provide you with a “rainy day” fund that can be used to cover any short-term financial concerns that pop up and get you out of a financial emergency.
These emergencies could include small things such as your car breaking down or your fridge blowing up, or bigger concerns that many people have experienced in 2020. Things like losing your job, or reduced hours and income impacting your ability to pay your fixed monthly expenses.
- Your initial target is to build up $1,000 – $2,000 in a savings account that can be used as your cash safety net. Over time your goal should be to grow this to three to six months of your living expenses. Once you have it, forget about it. It’s not to be touched unless it is being used for a financial emergency.
Having this reserve will reduce the financial stress and anxiety in your life, and will give you confidence and peace of mind. If something bad happens – you’ve got money available to pay for it. Therefore, you don’t have to rely on credit cards or borrow money really quickly and pay high interest rates to get you out of a financial emergency. You will be able to feel secure that you can look after yourself and your family financially if things go wrong.
2. Wealth Protection Cover
Insurance is a subject that no one likes to talk about and pay for as it’s seen as an expense for something that you hopefully never have to use. However, people often see it as an important and valuable resource when they actually have to use it – then, it’s one of the best “investments” they’ve ever made!
Australians are known to have a large underinsurance problem. Rice Warner data from their 2017 “Underinsurance in Australia” report revealed that there is a $1.8 trillion dollar gap between current levels of insurance in Australia, and the cover Australian families would need to maintain their quality of life until retirement if affected by death or disability.
Personal insurance is taking out an insurance policy on yourself to make sure that if something happens to you, you are protected financially. If something goes wrong from a medical point of view or you are unable to work for any period of time because of an accident, you’ll have a safety net in place. The best way to think about it is considering it as wealth protection – a policy that protects the most important things in your life e.g. you, your family, your income, and your assets.
We consider wealth protection cover just as important as the long-term financial strategies we put in place for clients. And the main reason for that is in order to achieve those exciting long-term financial goals, you need income. Income to save, pay down debt, and build assets that will help to facilitate your goals in the future. But if something happens to you and you are unable to earn an income, you can’t work towards those goals and it’s going to limit you and your family’s ability to live an amazing life and do the things you want to do.
So, having insurance in place to protect your wealth is an extremely important aspect of your financial security.
3. Estate Planning
The final aspect of feeling financially secure is making sure that you have your estate plan in order. 70% of Australians don’t have a will (*1), and yet it is there to help your loved ones in the event of your death – one of life’s most difficult certainties.
The amount of people wanting to create Wills amidst the Covid-19 environment has grown drastically – 160% over this time last year(*1). That’s because people are prioritising it now even though it is something that has been on most people’s to-do lists for some time.
It’s terrible to think about what will happen to your family and assets after you’re gone, but it’s a very important piece of the puzzle when building your financial foundations.
This is one aspect of personal financial planning that people tend to put off or avoid because no one likes talking about death, or thinking about the loss of themselves or a loved one. But I can tell you from personal experience with clients that when a will and estate plan isn’t in place, it can get very messy and lead to families being torn apart over money.
If you haven’t spent time mapping out your wishes and making it clear what needs to happen with your assets, your money can end up in the hands of the wrong people.
There are three main things that we talk to clients about ensuring they put in place to tick the estate planning box.
- The first one is to put in place a Will – outlining your instructions and what you would like to happen to your assets when you die.
- Power of attorney – giving someone (usually a partner or close family member) the ability to make financial decisions on your behalf, if you are unable to.
- Enduring Guardian – giving someone (usually a partner or close family member) the ability to make medical and lifestyle decisions on your behalf, if you are unable to.
These three things will give you peace of mind that your loved ones will be looked after and protected in the event that something bad happens to you. And realistically, outside of a major lifestyle or financial change in the future, it is highly likely you won’t need to change your will again.
The three points I’ve outlined in this article are actionable steps that you can implement to give yourself financial security, which will allow you to walk into 2021 with a strong foundation in place. It will allow you to navigate the crazy times we live in and give you peace of mind that if there’s another unexpected hardship in the future, you and your family are set up from a financial perspective to weather the storm.
Ryan Porter is a Wealth Coach at Catalyst Wealth Group. His mission is to help his clients achieve financial success and live their ideal life.
Any advice or information in this publication is of a general nature only and has not taken into account your personal circumstances, needs or objectives. Because of that, before acting on the advice, you should consider its appropriateness to you, having regard to your objectives, financial situation or needs.
*1 – Finder.com podcast “The real reason why you need a will” Ep #212 with Anna Hacker