One of the issues that repeatedly crops up when dealing with clients is, “How well placed are you to deal with unforeseen expenses?”
The expenses can range from relatively minor things such as an appliance suddenly failing, a minor car accident or a leaky roof, through to things far more catastrophic – a major illness, death of your partner, loss of job, marriage breakdown or any of a whole host of other things.
I started thinking along these lines, on reading a story in the Financial Review on 1st July. The story reported a survey carried out by the US Federal Reserve, to assess the resilience of American households if some financial shock occurred.
Their Fed asked respondents how they would pay for a $400 emergency. The answer in 47 percent of cases was that THEY COULDN’T. That’s right 47 percent of people could not pay for a $400 emergency without selling something or borrowing the money.
What is the situation here? We don’t have data like the US, but anecdotally, there are many people who are overstretched and poorly placed to pay for emergencies. Financial Planners often see people committed up to their necks with big mortgages, expensive cars (often bought with borrowed money), flat screen TV’s and all the fruit a modern household “must have”.
Every dollar of income is committed, and any emergency will have a big impact on lifestyle. A big emergency may well have a catastrophic impact, and put you back decades.
So, what can you do? Insurance is part of the answer, but not the full answer. It costs money, and many events aren’t covered by insurance.
Industry icon Peter Thornhill proposes a very simple solution:
“spend less than you earn, borrow less than you can afford”.
Simple as that. Not sexy, but simple.
