As a concept, financial wellbeing is becoming increasingly important for both businesses and individuals. The rationale being that there is an established link between our financial fitness and other areas of our lives - namely our physical, mental and social health. If we have money worries, it’s likely to hurt us in other ways as an individual and ultimately could make us a less effective employee.
This isn’t a concern solely for those on low incomes. Even higher earners can experience financial stress, whether they’re trying to ‘keep up with the joneses’, face gambling problems or poor performing investments.
The impact of Covid-19 has already tested the financial resilience of individuals, families and businesses and we are unlikely to have seen the peak as recession starts to bite. How then, can you objectively test if you are financially resilient?
Here are four key questions to ask yourself:
1) Are you managing month to month?
Is there money left at the end of the month, always, sometimes, or never? Do you seem to have ever-increasing debt? What does your credit score look like and is that something that needs attention?
If you share financial dependency with other people, a partner, children, or you share a living space with someone else, your level of resilience arguably needs to be that much higher.
You may have found during the pandemic, that this test has been easier to pass because there have been less things to spend your money on, such as commuting and social activities.
Perhaps the biggest test is yet to come as businesses have to make the tough decisions about redundancy and restructures, which focuses the mind on the second question.
2) Could you absorb a financial shock?
What would happen if a financial rainy day came along?
You need to think in terms of the things you own. Do you have savings or insurance if something happened to a household appliance, to your car, or your phone?
Now think about what could happen to you. If you got sick, would you be paid and how long for? Do you have care responsibilities and what are the financial implications there? As a worse-case scenario, what if you died? What would that mean for anyone dependent on you?
Now think about your income. What if you lost your job or had to endure a pay cut? Do you depend on bonuses or variable income that may not be forthcoming in the short term?
For each financial threat, are you clear on what you have personally to cover each risk and what you would get from your employer and from the government?
The normal guidance on emergency funds is 3-6 months of essential income. In the pandemic, there’s a real argument for this being double. With the added risk that you would be reliant on credit in these circumstances, it would be reasonable to consider that access to credit will become tighter depending on the strength and duration of the recession.
3) Do you have flexibility to make choices?
This is primarily a question of financial freedom. Rather than just existing and protecting yourself, are you moving your life forward in some way? Think about short to medium-term savings goals beyond building that emergency fund up.
What about getting on the housing ladder? Planning a holiday, if and when you can have one. At some point in your future, you’re probably going to want to stop work, so what, if anything, are you setting aside for retirement? Are you able to meet these goals on your own or will you need some help beyond what your employer or the government might offer you?
If you have children, what visions do you have for their education? Would you like to help them with driving lessons or help them get on the housing ladder?
Standard guidance is to try as much as possible to have SMART saving goals. Saving money but with no allotted purpose for that money makes it difficult if temptation comes along. Given the current pandemic, some of these goals may have to wait.
4) Are you on track to get what you’re after?
It’s all well and good having financial goals, but if you’re never going to get there, that alone is an inevitable source of financial stress. Have you captured all of your money needs and wants and prioritised them? Focus on the most important things first and then move down the list. Perhaps apply a traffic light system against each one and deal with the red items first to get yourself on track.
If your short-term financial situation isn’t strong enough you may have to access your other funds and savings to maintain financially resilience at this time.
With a healthy set of questions to ask yourself, the next step is searching for the answers based on your circumstances and who else is involved. What do you have already that could meet your identified needs? What do you need to change if you’ve identified a gap?
If you’ve taken the step of asking the difficult questions, the next step might be taking specific action to improve your understanding or your current financial position. If you're based in the UK try the following services:
It can be uncomfortable talking about money but where there is dependency it’s important to have open and honest lines of communication to avoid nasty surprises down the road. This is particularly true in the current climate.
The key starting point here for you and your dependents is visibility and making use of the help that’s available to you.
Once you have that clear set of requirements for you personally and for your dependents, the business of managing your money to meet those needs can begin.
This article was written in partnership with Mercer Marsh Benefits.
CABA provides free lifelong support to past and present ICAEW members, ACA students, ICAEW staff, and their close family members.
We have a range of services to support your financial resilience including benefits advice, legal information and UK debt management, find out more by contacting us today.
If you’re worried about the impact of the pandemic on you and your family, find out how CABA can support you.