Over the last few months, it’s likely that you’ve had to manage your finances carefully.
You may have been furloughed and had to survive on a reduced income. You may have had to take time off work through ill health. Or, worse, perhaps you have been one of the many people who lost their job during the pandemic – an eye-watering 395,000 just in the period from September to November 2020.
Whatever your situation, the last year has taught some valuable financial lessons. Here are five.
1. Protection is vital
One of the best ways you can cope with unexpected events is to put the right protection in place. While you probably insure your car, home, pets, or even your phone, do you protect your most important asset: you?
Protecting your income, your health, and your life is an easy way to get financial peace of mind. It can help you absorb financial shocks and ensures both you and your family are looked after if the worst should happen.
For example, if you became ill and had to take time off work, this could put a heavy strain on your finances. Statutory Sick Pay is less than £100 per week, so if you have ongoing commitments such as rent or mortgage payments it’s unlikely that you’d be able to make ends meet on this amount.
In this scenario, income protection could help. After an initial excess period, income protection pays a portion of your salary to help you meet commitments such as a mortgage and other monthly bills.
Critical illness cover ensures a tax-free lump sum is available if you’re diagnosed with a serious condition, such as a heart attack, a stroke, or certain types of cancer. It ensures you and your family don’t have to worry about money as you focus on your recovery.
And life insurance provides your family with a lump sum if you pass away. It can enable them to remain in the family home, pay the bills, and ensure your children get the future you want for them.
Contact our experts if you want to get protection but aren’t sure which type is right for you. We can help you find the most suitable cover for your needs.
2. You need an emergency fund
The last year has shown us that unexpected events can strike at any time. This might be a period out of work, time off work due to ill health, or redundancy.
According to a survey by the Yorkshire Building Society, reported by Money Expert, more than a quarter of Brits don’t have enough savings to support themselves for a month if they were to be made redundant. The survey also revealed that a further 15% have no savings at all.
So, one lesson to learn is that it’s important to have an emergency fund available. Knowing you have money you can access quickly is a great way of gaining some peace of mind.
An emergency fund can act as a buffer against short-term disruptions. It can help you from having to rely on credit if you are unable to work. It can also mean you have cash available if you need to pay for something unexpected, such as car or property repairs, or a new boiler.
Most experts recommend that your emergency fund should contain around three to six months’ months earnings. You should hold this in an easy access account with a bank or building society so you can get hold of the money quickly if you need it. A Cash ISA might be a good option, as you’ll also benefit from tax-free interest.
This should be enough to give you some peace of mind to know that, if disaster should strike, you’ll be able to keep paying your bills until you get back on your feet.
If you’re self-employed or you work in a volatile sector you may want to consider keeping a larger fund.
3.Working to a budget can help you control your spending
It may sound boring, but budgeting is the cornerstone of good financial management. If you don’t know what your income and expenditure is, you can’t work out where your money is going and whether you could put it to better use.
A good place to start is the “50/30/20 budget”:
- Calculate your after-tax income and limit your ‘needs’ to 50% of this income. Needs include food, housing, utilities, insurance, car payments, and car insurance. Essentially, any payment that would severely impact your quality of life, such as electricity and prescriptions, is a ‘need’)
- Limit your ‘wants’ to 30% of your after-tax income. Wants include holidays, meals out, your streaming TV subscription, your gym membership, your magazine subscription, your mobile phone, and your non-necessary clothes.
- Spend the remaining 20% of your after-tax income on savings and debt repayments. This is the money you pay to your credit card each month, your pension contributions, and any savings. Your mortgage payment is a ‘need’, but any additional payments you make form part of this 20% category.
Budgeting gives you useful insight into your fixed costs and variable expenses. It will help you to stretch your available financial resources, particularly in uncertain times.
4.Saving is good
2020 turned many millions of Brits into “accidental savers”. This Is Money report that almost £17.5 billion a month was saved into current and savings accounts each month between March and June 2020, and households collectively added another £17.6 billion last November.
Whether you had additional disposable income because you were working from home, or you couldn’t spend your cash on holidays and meals out, or you deliberately saved more because of job uncertainty, your savings may have grown in recent months.
Saving is a great habit to get into and another good lesson we can learn from Covid-19. Paying yourself first – putting money aside on payday, rather than simply saving what you have left at the end of the month – can really boost the amount you save.
5.Pay off debt as quickly as you can
The economic impact of the coronavirus, and the various lockdowns, has meant that many Brits have found themselves temporarily unable to work. This has led to many people falling into debt, as they have had to borrow to pay for essentials.
According to a study by debt charity StepChange, reported by the BBC, 1.2 million people faced serious issues including falling behind on essential bills and using more credit to make debt repayments.
Paying off debt quickly has been another key lesson of Covid-19. If you don’t pay debts off quickly, they can quickly accrue large amounts of interest, which can put even more strain on your finances and potentially lead to a debt spiral.
Even if you’re only paying a little extra each month, try and clear your debts as quickly as you can.
Get the right protection for your needs
The right life, health, and income protection gives you the peace of mind that you’re protected should the worst happen. And, as we have seen in the last year, unexpected events can happen at any time.
At I’m Insured, we work with more than 200 of the UK’s leading insurers to help you get the right protection for you at the right price. It’s easy to get an online quote in minutes, and our experts can also help you to work out exactly what protection you need.
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