The Financial Conduct Authority (FCA) recently released the Financial Lives 2024 survey, finding that 49% of UK adults showed characteristics of financial vulnerability.

Characteristics of vulnerability include:

• Poor health
• Negative life events
• Low resilience.

Specifically, low financial resilience currently affects around one-quarter (24%) of UK adults. This includes those with low savings in financial difficulty, in the form of significant credit commitments or missed bills.

The unexpected can strike at any time, and so it’s key to build strong financial resilience into your planning from the outset.

Keep reading for five simple ways to do just that.

1. Build and maintain an emergency fund

The first step to building resilience – and your ability to withstand a financial shock – is to put an emergency fund in place.

Ideally, keep around six months of household living expenses saved in an easy access cash account so that you can get hold of it quickly, as soon as an emergency occurs.

Think carefully about the account you use and be sure to shop around for the best rate. Also, be aware that an emergency fund isn’t a one-time-only deal.

You’ll need to check in with it regularly to ensure it’s still fit for purpose. If inflation rises, say, your money could be effectively losing value in real terms, so keep only what you need to tide you over. If you have an excess, you might consider investing it for the chance of better returns, albeit with added risk.

2. Revisit your budget…

To be responsive when the unexpected occurs, you’ll need to be on top of the predictable day-to-day expenses in your household.

A simple list of incomings and outgoings is a great place to start. You’ll quickly see where your money is going, and it could help you to identify areas where you might cut back.

You might find that adopting a specific budgeting technique works. One such technique is known as the “50/30/20 rule”.

Simply split your monthly income into three key areas of expenditure and allocate funds according to the split below:

• 50% to “needs” like household bills, food, and fuel
• 30% to “wants” like holidays or meals out.
• 20% to your future self, through savings and investments.

The important point here is to pay yourself first, as much as possible, and then budget with what remains.

3. …And be wary of lifestyle creep

It’s important to remember that your budget isn’t static. Costs rise, and your income could too. This can lead to its own problems.

A bonus, pay rise, or promotion at work could mean you can afford more, which will inevitably see your expenditure rise over time. This is known as “lifestyle creep”.

You might treat yourself to a new car, change the supermarket you shop at, or simply pick a more expensive wine at dinner. It’s only right that you enjoy your increased wealth, but be sure your improved circumstances are reflected in your budgeting.

That means putting more aside for the future, now you can afford to, and factoring in your increased expenditure.

Revisit your budget a few months after a promotion or pay rise and make any adjustments if lifestyle creep is evident.

4. Protect yourself against a loss of income

Whether or not you’re the main breadwinner in your house, the loss of your income would likely detrimentally affect your family’s ability to pay household bills.

But a redundancy, accident or illness could strike at any time. So, protecting against a loss of income is key. There are a couple of ways to do this:

• Income Protection – This generally pays an agreed percentage of your usual income (after a deferred period), allowing you to continue paying bills until you return to work. You’ll have peace of mind that your outgoings are covered.
• Critical Illness Cover – Critical Illness cover generally pays a one-off lump sum if you are diagnosed with a condition set out in the policy. These usually include a stroke, heart attack, and certain cancers, as well as other conditions like multiple sclerosis or Parkinson’s disease. The money might be used to cover bills while you recover or to make house alterations if these are required.

These products clearly protect against different scenarios, so it might be that both are required to sufficiently cover you against a future shock.

5. Life insurance protects your family should the worst happen to you

Life cover is the ultimate protection. Having it in place can provide peace of mind that your family will be financially looked after when you are gone. But there are different types available, so think carefully about the product that best suits you.

• Term assurance – This pays a specified sum assured on death within the policy term. You might set the term to coincide with the length of your outstanding mortgage payments, say.
• Decreasing term assurance – A type of term assurance with a sum assured that decreases over time. This could be particularly useful for covering a diminishing debt.
• Whole of Life – These plans pay out whenever you die, but you’ll need to keep up-to-date premiums, and the amount you pay each year could be subject to review.

Be sure to speak to us for advice before you make a final decision.

Get in touch

If you need help withstanding a potential future financial shock, we can help. Email info@thepensionplanner.co.uk or call 0800 0787 182.

Please note:

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Note that life insurance and financial protection plans typically have no cash in value at any time, and cover will cease at the end of the term. If premiums stop, then the cover will lapse. Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.