Invest in your safety-net before you fall

For most people, January is a time for resolutions, new projects and goals. This is the same for personal finance as well. January is the time when people review their financial situation and start to tackle the jobs that have been put off for months.

These reviews tend to fall into one of four categories of ambition: earn more, save more, purchase property, repay or reduce debts. This is the natural consequence of a process that usually involves calculating personal net worth and then resolving to improve on the resulting number over the course of the year.

This is a noble and very worthwhile aim, but as with much else in personal finance, there is more to it than meets the eye.

Financial planning should not just be about improving one’s situation, but also about guarding against the upsets that life can throw at us. This might involve medical, health or life insurance, writing a will or taking tax advice.

These are subjects that are easy to overlook and are seldom as exciting as making money - so they are forever being postponed. But in my eight or so years as a financial adviser, I can only recall meeting two people that had a sufficient amount of life assurance to protect their families in the event of their untimely demise.

A lady in Britain once explained to me that life assurance was a waste of money because she "had not used it".

Another subject almost universally ignored in finance is that of income protection. While we are in good health, we find it hard to imagine that anything could go wrong, but it can and does.

Readers of European Voice are for the most part office-workers. Many receive excellent employee benefits. But this is not the case for the wider population. In fact, outside government or civil service jobs, very few employers offer the style or level of sickness benefits that an individual would require should they become permanently unable to work.

This should be a concern because without the ability to earn an income, most families would find that their finances collapse around them in a matter of months. Even most insurance policies do not cover an initial period, set at the outset, which may last for between one and twelve months. As you might imagine, a policy that begins to pay sickness benefits from the end of the first month of ill health is far more expensive than an identical plan with a six month initial period.

For this and other reasons, the textbook advice of the financial planning community is that everyone, both families and individuals, should set aside an emergency fund in case of disaster. It is generally recommended that this fund should be equivalent to several months’ income, thus enabling you to survive in the short term whilst waiting for insurance, state or employer support to begin.

Depending on who you ask, it is recommended that this emergency fund should equate to between three and six months’ income. That in itself will take some time to save. It goes without saying that this money should be held in an account that bears no risks and is instantly accessible.

This should be set aside before other investments are considered. All too frequently, people think of using spare cash for illiquid and high-risk investments before putting this safety-net in place.

This year, when assessing your finances, think a little more deeply about how you and any dependents you may have would be affected if something in life went wrong. Consider putting your own safety-net in place before you look to invest.

• Stuart Langridge is an independent financial adviser.

For most people, January is a time for resolutions, new projects and goals. This is the same for personal finance as well. January is the time when people review their financial situation and start to tackle the jobs that have been put off for months.