Be prepared for any unexpected downturn in your personal finances

We all run the risk of one day being affected by an event that has a direct impact on our finances: a pandemic, illness, accident or job loss, any one of these events could upturn our daily lives and leave a hole in our finances. We have a few tips on how best to prepare for and react to any unexpected downturn in your personal finances.

Although we can’t anticipate everything that life may throw at us, there are strategies we can use to compensate for any negative economic consequences that may occur. These strategies are based on three basic pillars: upstream preparation, a clear overview of your situation should crisis occur, and downstream adjustments.

1. Set up a rainy day fund

Although myLIFE regularly encourages you to invest in markets (equities, bonds, funds, SICAVs, etc.), we can’t stress enough how important it is to have a rainy day fund that can be accessed immediately when needed. It is the base of what we refer to elsewhere as the investment pyramid. Ideally, you should have some liquid savings (e.g. on a savings account) to cover at least three months of outgoings. Some households may decide it’s better to cover a longer period (from six months up to two years), depending on their specific situation.

This type of safety buffer will give you peace of mind in the early weeks of any crisis, and enable you to meet your financial obligations (loan instalments, recurring bills, etc.) without any undue pressure.

2. Manage your budget

Your budget is a key tool providing you with an overview of how your money is spent and your financial health. If you take a methodical approach to drawing up your budget, you will have a clear overview of your situation and be able to avoid living above your means or getting into debt by focussing on your essential needs such as healthcare, housing, food and medicine. Being aware of your monthly incomings and outgoings is also key in establishing how much money you should allocate to the rainy day fund that we mention above.

Even if your finances are currently in good shape, something can always go wrong. It’s highly recommended that you plan for rainy days in great detail. And if crisis strikes, a clear overview of your budget means you will be able to adapt it quickly to your change in circumstances. If you need help with this, have a look at the special “budget” section on myLIFE.

3. Schedule payments

Get into the habit of scheduling standing orders for recurring bills at the start of the month, rather than at the end, that way you won’t overestimate your available funds. Similarly, create a list of your recurring outgoings to see what proportion of your budget they account for. Take the time to check your account balances once or twice a month (e.g. on the 1st and the 15th) together with any outstanding payment dates, in order to avoid any late payments. Late payment charges can place a burden on your budget, or even have more serious consequences (e.g. you could simply see your credit card cancelled).

After completing these three initial steps, you are equipped to deal with any downturn in your personal finances. Now let’s take a look at what to do if you such a crisis actually occurs.

4. Manage your bills wisely

As you have a clear and well-managed budget, you can study it closely to determine which items of expenditure are unnecessary (a second phone line, a vehicle you don’t use, a subscription that exceeds your needs, secondary leisure activities). Remember to include the little things that can add up to quite a substantial sum (the Danish pastry you buy each morning at the service station, the beer or pot of Nutella in front of the telly of an evening, etc.).

You should also be prepared to cancel or postpone some planned expenditure and, possibly, to scale back some of your insurance cover. It might be the time to compare the insurance cover available to see if it’s possible to get similar cover from a different provider on better terms. But make sure you maintain your cover at a level to meet your requirements and provide adequate protection in the event of future crises (e.g. disability insurance for serious illness).

You will be able to make savings if you can reduce the level of your monthly outgoings. This will reduce financial pressure and make paying bills easier in the future, even if your incomings are declining.

5. Take stock of your non-financial resources

Identify all of your assets, including non-financial assets, in order to be well prepared. These non-financial assets may help you manage your budget on an optimal basis and avoid future purchases of unnecessary items. Make a comprehensive list and use these assets wisely. There are many examples of such non-financial assets, e.g., food stocks you can use for meals in the short and medium term, that box in the attic that is full of clothes that you haven’t worn for a long time, old toys in the cellar that can still be used, or even a musical instrument waiting to be taken out of its case as an alternative to another more expensive leisure activity. All of these small things can tip the scales back in the right direction.

6. Identify new sources of income

If the financial outlook is bleak, you can also look around for new ways to earn money. This could include selling some items that you don’t use, or looking for a source of additional professional income. Even if rather limited, this income will be a welcome help in dealing with the situation. Who knows, you may even end up changing career for the better!

7. Make sure you carry on with routine maintenance

This last point may seem counterintuitive, but don’t cut back on maintenance for your body and property. You may be tempted to think that all is well and you can save money by skipping a medical check-up or a service on your car. Not a good idea! As the saying goes, “an ounce of prevention is better than a pound of cure.”

If you want to avoid your car breaking down and needing replacement, and ensure that your house is free from the effect of termites or damp and that you remain in good health and will not incur costly medical bills in the future, then proper maintenance is called for! This will allow you to identify any problems upfront and find a rapid and efficient solution to keep your house, your vehicle and your body in good working order. Taking regular care of these by devoting a bit of your time and money to them will save you substantially higher costs in the medium term.

Anticipate, manage, adjust are the watchwords when responding to a downturn in your personal finances. Being well prepared will give you greater peace of mind to deal with difficult periods. Having a clear overview of your situation and taking the bull by the horns will mean that you can significantly reduce any financial pressure caused by the crisis you are experiencing. Stay calm!