Scotsman article: When rainy days are forecast, best make sure you are putting something aside

12 December 2009

EACH week The Scotsman gives you a top ten guide to pertinent financial issues. No-one wants to encounter the financial challenges that can be brought about by death, illness, unemployment or unexpected costs, but many of us will face such challenges over the course of our lives. Paul Lothian, a director of Verus Chartered Financial Planners in Dundee, shares his top tips on preparing for and mitigating the financial consequences of unwelcome news.

1 EMERGENCY FUND

This is a cornerstone of good financial planning. Try to keep at least the equivalent of six months non-discretionary living expenses on easy access deposit. This would cover items such as rent/mortgage, council tax, energy bills and food. If your income is unexpectedly stopped or reduced, this fund will help keep the wolf from the door for a reasonable period. If you don't have such a fund, start saving for one now. This may mean cutting back on discretionary expenditure for a while.

2 DON'T BORROW TO BUY NON-ESSENTIALS

Save up and buy them once you have the cash. Despite the crunch, credit is still easy to come by and too many of us find ourselves overextended when our income comes under pressure. By deferring our gratification, we reduce the financial risks. Moreover, being able to pay in full in cash may mean we can negotiate a healthy discount on our "luxury" purchases.

3 MAKE HAY WHILE THE SUN SHINES

If you are lucky enough to have surplus income over expenditure (and have an emergency fund to one side), consider making overpayments to your mortgage. This will generally enable a payment holiday in the future should the need arise. It has the added benefit of reducing the mortgage balance and also therefore the required normal monthly mortgage payment.

4 MAKE A HOUSEHOLD BUDGET AND STICK TO IT

Do you actually know what your income and expenditure amounts to and how it's broken down? List your net monthly income and itemise your outgoings, separately identifying discretionary and non-discretionary expenditure. Bank statements are often a good starting point. Remember to allow for ad hoc or irregular/variable items such as holidays, car repairs and Christmas presents. Where could you save money (for example, on insurances and utilities)? Do you have a contingency against possible increases in mortgage, rent or council tax rates?

5 SICK PAY

Many people have no idea what their employment contract terms provide for in the event of absence through illness or injury. If you are among them, find out. Some employers are generous in this regard with most public service posts providing for up to six months full pay (then half pay for a further six months), whereas the minimum benefit, statutory sick pay (SSP) pays a maximum of around £80 per week.

6 WHAT IF I AM MADE REDUNDANT?

While redundancy settlements are often more generous, many (especially where the employer has failed) will be paid at the statutory minimum level by reference to age, pay and qualifying service with the employer. For example, someone aged 35 earning £300 per week and with eight years continuous service might get just £2,400. Redundancy payments up to £30,000 are generally not liable to tax.

7 WHAT'S THE WORST THAT COULD HAPPEN?

Carry out a risk assessment by asking yourself what would happen to your household income and expenditure if:

A – I or my partner were made redundant/ lost my job?

B – I or my partner died?

C – I or my partner were unable to work through illness or injury?

Where you identify (or suspect) a shortfall in any of the above areas consider insuring against it, through life assurance, critical illness cover or income protection insurance.

8 SPEAK TO LENDERS AS SOON AS POSSIBLE

If the event of one of the above catastrophes, most responsible lenders will provide reasonable assistance, usually by temporarily suspending payments or deferring capital payments. Make early contact with them before missing a payment.

9 CLAIM WHAT YOU ARE ENTITLED TO

Make sure you receive what is rightfully yours in State Benefit provision. Contact your local Department of Work and Pensions office or use the online benefits adviser at www.direct.gov.uk. Also try www.entitledto.co.uk to check you are getting what is yours.

10 ASK FOR HELP

Friends and family will often want to provide practical, moral and financial support in times of need. Don't be too proud to accept such help if it's offered, and to seek it if necessary. You will get your opportunity to repay their kindness.

Paul Lothian is a director of Verus Chartered Financial Planners in Dundee.

« Back to news main page