As we head into the new financial year, it’s worth taking a few minutes to check how well you would cope with an unexpected financial shock.
None of us knows exactly what lies around the corner, and research1 suggests many of us would face a tough time if we lost our job or faced an unexpected bill.
In particular, the study found one in two households only have enough savings to get by for three months if the main breadwinner lost their job. Two out of five (37%) households only have the equivalent of one month’s worth of income to fall back on.
Just as worrying, many of us would struggle to pay off an unexpected bill of $10,000. Almost half of the nation’s households could manage to pay off this sort of bill in three months, but 38% would need six months or more to clear the expense.
These sorts of findings illustrate how our financial wellbeing can quickly head downhill if the unexpected happens. Some sensible strategies can go a long way to help shock-proof your finances, helping you maintain your lifestyle through good times—and bad.
Budgeting to take control of your money is a key part of insulating your financial wellbeing against unexpected shocks. We often have a tendency to spend all our income—and to justify doing it but if you make a commitment to spending less than you earn, it’s hard to go wrong.
Having some personal savings behind you makes good sense at any time and it can provide a fiscal lifeline if you hit a financial speed hump. However it takes a plan of action to get started.
Let’s say for example you’d like to accumulate savings of $5,000 over the next 12 months. That means saving around $200 each fortnight or about $100 a week depending on when you are paid. It is vital this money is automatically locked away before you have a chance to spend it. Ask your payroll manager to transfer it to a separate bank account or set up an electronic transfer of your own to a high-interest savings account.
On the other side of the ledger, be wary of taking on more debt than you can comfortably manage. Interest rates are exceptionally low right now and that makes the present a good time to reduce debt—not to load yourself up with more.
Use our budget planner calculator or MoneySmart’s TrackMySPEND app to get your finances in order and speak with a professional financial adviser to help make sure your finances are on solid ground for the new financial year.
Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.
1 Research by ING Direct.