Could you withstand a financial shock?


We’re often told to prepare for the unexpected financially, whether it’s a household bill or being unable to work due to illness. But, it’s something we often put off or believe won’t happen to us. Yet, it’s more likely to happen than we think.

According to research from StepChange Debt Charity, around 23 million people have experienced a life shock in their household in the past two years alone. Whilst the research focussed on how a financial shock can lead to debt, it also highlights how it can place people under financial pressure. The study estimates that three million people are in problem debt in Great Britain. Another 9.8 million are showing signs of financial stress.

Many people struggling financially find themselves in this position following significant life events they may not have control over, including:

  • Birth
  • Death
  • Relationship breakdown
  • Illness
  • Caring responsibilities
  • Fluctuating employment

As a result, it’s important to think about how you’d cope should you face a financial shock.

Building financial resilience

Considering your financial resilience, both now and in the future, should form part of your wider financial plan. It’s not just about entering debt either; could you afford to maintain your current lifestyle if you were to face a financial shock? How long would your assets provide you with a safety net for?

Often when looking at financial resilience and how to improve it, the first place to start is assessing your emergency fund. Ideally, you should have cash in an easily accessible account that would cover around six months of your essential expenses. This gives you some breathing room should your income suddenly stop, or you face an unexpected cost.

A robust emergency fund means you can focus on other aspects of your life, rather than worrying about money should something happen. This can provide peace of mind, particularly if you become too ill to work.

An emergency fund that could support you for six months can seem like a tall order if it’s not something you’ve already built up. But contributing to savings regularly, even if it’s a small amount, is key. Although interest rates are low, shopping around for the best deal can help you get the most out of your money. However, it’s important not to be tempted by accounts that lock your money away in return for higher interest rates; an emergency fund should be quickly accessible.

Looking further ahead

In most cases, an emergency fund of six months of outgoings will be enough to allow you time to get back on your feet. Yet, there are thousands of people that find themselves off work for a longer period or face multiple shocks in short succession, decimating their emergency fund. This is why it’s just as important to consider what would happen over the long-term too.

There are two key areas to evaluate.

Sick pay

If you were unable to work due to accident or illness, how much would you receive in sick pay?

First, if you’re an employee that earns an average of at least £118 per week, you’ll be entitled to Statutory Sick Pay (SSP). To receive this you must have been ill for at least four consecutive days, including non-working days. It can be paid for up to 28 weeks and is designed to provide you with some financial support if you’re unable to work.

However, SSP is just £94.25 per week, far lower than your expenses are likely to be. As a result, you’ll probably still need to dip into your emergency fund or other savings if you’re only receiving SSP as income.

Many employers offer enhanced sick pay, providing an improved safety net and financial resilience for employees. How much you’ll receive and for how long varies between companies. So, you must check your contract or employee handbook to find out what your employer’s sick pay policy is.

Financial protection

If after looking at your savings and potential sick pay you are worried about how you’d maintain your lifestyle, financial protection is something to consider. Although an important part of a financial plan, protection products are often overlooked. After all, no one wants to think about becoming too ill to work.

A protection product will pay-out under certain circumstances, as long as you are up-to-date paying the premiums. How much and how a protection product pays will depend on the type of product you choose and the level of cover.

For example, critical illness cover will pay out a lump sum if you are diagnosed with an illness that’s listed on the policy. In contrast, income protection will usually pay a regular income for the period you’re unable to work or until you reach retirement age. The greater the level of cover you want, the higher your monthly premiums are likely to be.

The type of protection product that’s right for you will depend on your circumstances and priorities. To discuss your current financial resilience and what you can do to improve it, please contact us.