In May 2022, the Financial Conduct Authority (FCA) reported that one in four of all UK adults had low financial resilience* meaning they could quickly find themselves in financial difficulty if, for example, they have little to no savings or are heavily burdened by their domestic or credit commitments. This is something most of us have felt in recent times.

Financial resilience doesn’t just mean being able to keep a roof over your head and food on the table, but also helps to preserve your ability to achieve your long-term financial objectives. After all, you’re not going to prioritise or even be able to save for your retirement if you’re struggling to make mortgage repayments.

So, how can financial planning build resilience? To answer this, I’ve outlined three key areas of Financial Planning: Budgeting, Managing Debt and Protection.

Budgeting and Managing Debt

The first stage of any budgeting exercise is to analyse your current spending.  Jade North, a Chartered Financial Planner here at CBW Financial Planning, wrote a great article on expenditure which can be found here.

Expenditure analysis allows us to determine whether your income exceeds your expenditure or if the reverse is true. Unsurprisingly, you’ll need spare income to be able to strengthen your financial resilience. If your expenditure is close to, or exceeds your income, you’ll need to reduce spending and the analysis will help highlight where reductions can be made.

Once in a surplus cashflow position, a sensible step to improve your financial resilience is to build an emergency fund. One of our Chartered Financial Planners, Charlotte Elgar, touches on the subject in her article. As explained, there is no exact science on the amount of cash an individual should have. However, the main benefit of having access to cash is that it avoids either borrowing money or accessing investments. Therefore, the more cash you have the more protected you are.

In the current climate borrowing is expensive. Expensive debt hinders your ability to invest towards your long-term objectives as you’ll need to allocate more of your income to repayment. Furthermore, if you have investments you may avoid borrowing by withdrawing from them but in times of market downturn you’re hindering your investment’s ability to recoup its value. This is known as ‘Pound Cost Ravaging’.

Of course, you may already have debt that needs to be considered. Importantly, the budget exercise allows us to determine if you can afford overpayments and if there would be any benefit in you doing so.  This could prove beneficial as it reduces the outstanding capital incurred but also helps to repay the debt earlier, freeing up a portion of your income to be directed elsewhere.

Protection

Once an emergency fund and a view on debt repayment has been established, the next step towards building financial resilience is Protection. The aim of all protection policies is to avoid the financial impact caused by various events.

For example, Income Protection will replace a portion of your salary if you’re unable to work due to ill health or if an accident occurs. This allows you to continue to meet necessary items of expenditure such as your food bill or mortgage repayment, without needing to borrow or dip into investments.

Similarly, Critical Illness will pay a lump if the insured person contracts a specified condition. Apart from basic living expenses, the payout could be used for things like care costs or even home improvements required to make life easier as a result of the condition

Conclusion

To conclude, each of the areas discussed above adds a layer of resilience helping to maintain a balance between security of today but planning for tomorrow.

As a simple example, if you have Income Protection, you avoid needing to access your investments either completely (depending on when you return to work) or at least in part.  Therefore, preserving the growth potential via compound interest.

Equally, if you’re unable to take out protection for whatever reason, by having an emergency fund of cash you protect your investments which typically have greater growth potential compared to cash alone.

What Next?

If you would like to discuss your financial situation, please feel free to contact us.

*Source: https://www.fca.org.uk/data/financial-lives-2022-early-survey-insights-vulnerability-financial-resilience 20th October 2022