COVID19 Has Taught Us to Build a Financial Buffer

The COVID19 crisis has changed the world in so many ways. So many of our assumptions and certainties have been challenged, and we have been taught many lessons ranging from our adaptability as humans, to our interconnectedness within the world in which we live.

COVID19 has also taught us the importance of establishing financial buffers to see us through unforeseen circumstances. Having financial buffers provides us with security and resilience in an uncertain world, and softens the blow of unexpected financial emergencies.

There are many situations where financial resilience may prove useful such as the recent extensive unexpected job loss in our communities, and reduced income for many. However, there are other types of unexpected emergencies that may occur such as personal injury, theft of assets, damage to our home or vehicle, ending relationships, market crash, and the list goes on.

How do we plan for these events? We can prepare for unforeseen situations through a combination of three strategies.

Ready cash savings

Having sufficient cash savings readily available in the bank when you need it is the first defence in such a scenario. But how much is enough? That depends on your specific circumstances and tolerances, and different amounts are right for different people. Work out the minimum amount of funds you would need to live on for anywhere between 3-12 months, depending on your specific circumstances, tolerances, considering any dependents, and aim for that amount. You will need to allow for the essentials such as food, accommodation and bills, as well as provisions for other aspects of your lifestyle which you wouldn’t want to do without.

Accumulating wealth through assets

In addition to ready cash savings, it’s a great idea to invest in appreciating assets such as shares or property. Appreciating assets are essentially assets that we normally expect to grow in value over time, unlike cold hard cash. Shares are more liquid than property, which essentially means that during a crisis when you need access to cash quickly, they can be sold for cash quite readily. On the other hand, shares can be quite volatile in their value, and you may find that during a crisis share values significantly drop as was the case for many during the COVID19 crisis, and previously during the 2008 global financial crisis.

Property can be a fantastic asset to have during a crisis, particularly if you’re fortunate enough to fully own it outright. Knowing that one will have a roof over one’s head during a financial crisis is very reassuring indeed. However, as an asset property is not very liquid. So if you need cash quickly you don’t want to be relying on selling a property to pay for next week’s grocery bills.

Insurance

The right level of Income Protection Insurance cover provides great certainty against unexpected loss of income due to various circumstances. These insurances are complex, with many variations and factors to consider such as the level of cover, waiting periods, premiums, qualifying criteria and the effects of pre-existing medical conditions. When purchasing these insurances, it’s important to make sure the level of cover for each insurance type is appropriate for your specific circumstance. A brief description of the various types of income protection insurances is provided at the end of this article.

There are many other types of insurances which protect against unexpected incidences such as Health, Home, Content, Car, Travel and even Pet insurance, and so many others.

The various types of income protection insurance

• Life Cover – Life Cover pays a lump sum amount of money to your nominated beneficiaries when you die. This type of insurance is important if you have financial dependents or debts. If you depend on someone financially, it’s important for them to have the right level of Life Cover insurance.
• Total and Permanent Disability (TPD) Insurance – This insurance pays a lump sum if you become totally and permanently disabled because of illness or injury.
• Income Protection – Insurance which pays up to 85% of your pre-tax income for a specified time if you're unable to work due to partial or total disability.
• Involuntary Unemployment or Redundancy Insurance – Cover which pays a percentage of your previous income for a pre-agreed timeframe if you are made redundant.
• Trauma Insurance – Trauma insurance, also called 'critical illness' or 'recovery insurance' pays a lump sum amount if you suffer a critical illness or serious injury. This includes cancer, a heart condition, major head injury or stroke. Trauma insurance does not cover mental health conditions.

With so many different types of insurances available, it’s important to strike a smart balance between sufficient cover and not forking out too much of your hard-earned income towards insurance premiums.

Now is the time to take action and plan for that rainy day and work toward making ourselves more financially resilient.