Do you ever feel as though you’ve only just made it to pay day with a few dollars to spare in your wallet? According to the statistics, you’re not alone. Research has put the share of the population living pay day to pay day at between 32 per cent and 46 per cent.i What’s more, many Australians say they don’t have (or couldn’t raise) even $500 to pay for an unexpected expense.ii
In a way, these numbers reflect the laidback ‘she’ll be right’ attitude that pervades our culture. But the reality is that we all live with risks, both big and small, that we can’t avoid.
That’s where a financial safety net comes in handy. Making sure that you are prepared for financial setbacks or unanticipated costs does not come down to any single measure. Rather, it’s a comprehensive approach to risk that’s designed to protect you and your family’s financial wellbeing, come what may.
Maintain a rainy day fund
The first line of financial defence for households is to have some money tucked away in a ‘rainy day’ fund for emergencies and unexpected costs. If you are living from one pay day to the next and your hot water heater bursts or your car needs urgent repairs, the temptation is to whip out the credit card.
If you are only able to make the minimum monthly repayment you could be paying off that hot water heater for years to come. Whereas paying cash will save you money and make your financial goals that much easier to achieve.
Most experts suggest you aim to put aside three to six months’ living expenses. This can take a while to build up so one time-honoured strategy is to ‘pay yourself first’. It’s a good idea to keep your emergency cash in a separate account from your everyday money.
Even with the best willpower in the world it can be difficult to save if you are weighed down with debt. The good news is that with interest rates at or near their historic lows, there is no better time than the present to tackle debt. Aim to pay down loans with the highest interest rate first – typically this will be your credit cards.
If you have a mortgage, aim to pay more than the minimum monthly payment. By keeping at least three months ahead of schedule you can build a buffer to provide some wriggle room with your lender if you experience financial difficulties.
No financial safety net is complete without adequate personal insurance. We tend to insure our car and our house before we think about our most precious possession, our health and our ability to earn an income.
While health insurance will cover some of your medical costs, it won’t pay the mortgage and food bills or take care of your family while you are unable to work. Worse still, what would happen if you were to die prematurely? That’s where personal insurance comes in, to cover your life, total and permanent disability, trauma and income protection. It’s possible you already have cover for some of these through your superannuation fund, but it may not be sufficient.