None of us know what the future holds, but we can always make a few guesses.
Here are some things that are likely to set you back financially and also likely to happen at some point in your life:
- The boiler is likely to break down at least once.
- It is possible that you will, at least once, have the misfortune to lose a job.
- The chances are that interest rates will rise at some point in a lifetime.
- Ill health will probably prevent you from working at least once, too.
- Given the average life expectancy is 83, there is a strong chance you will get old and retire.
- Because you may well live a long life, you will probably need to pay for care.
- There will be recessions and booms, maybe two or three cycles in your lifetime.
- Any or all of these will, for sure, have an impact on your finances
- “Expect the unexpected”. But at the same time, limited means makes it hard to prepare for every eventuality. Some degree of preparedness will save you stress and anxiety.
Here are the top future proofs, straight from the experts:
- Keep three months’ worth of income in savings. Ideally. This is in case you lose your job or have to take time out of work.
- Have an emergency fund. This is so that if some unexpected event does happen, like the boiler breaks down, or the washing machine or the car, you can cover the cost of a replacement before any insurance kicks in (if it will at all).
- Future proofing means keeping a lid on debt as much as saving for the future. If you use credit cards, try to pay off the balance each month, or as much as you possibly can. Credit card debt can quickly rack up, making it hard to keep up with repayments. The same goes for personal loans. You are committed to repaying them for a fixed time period, during which your circumstances might change. Think carefully before committing and seek the lowest interest rate possible.
- If you have a mortgage or are thinking about taking one out, make sure you understand that making repayments on an “interest-only” basis means you will still have the capital to repay at the end of the term. Most lenders educate people about this now and take steps to make sure you have a good repayment vehicle in place. Nevertheless, for some, this can still come as a nasty shock.
- Save 15 per cent of your monthly income into a pension. This proportion gets higher the later you start saving. But 15 per cent is a good average target throughout your life.
- Diversify. If you are saving, investing or both, don’t put all your eggs in one basket, such as property, for example. Instead, spread your savings across a range of asset classes. That way, if one sector suffers, the rest of your portfolio can help limit the impact of any losses.
- Don’t invest more than you can afford to lose. Even if it means you don’t invest very much at all at first, it’s important to imagine what would happen if you lost that money completely. Because with investing, losses can and do happen.
- Overpay on your mortgage whenever you can. Often lenders are more inclined to allow borrowers who have overpaid in the past to underpay in the future. This “credit in the bag” with a mortgage lender can come in very handy.
- Save as much as possible. It’s so obvious but worth reiterating. Very low interest rates and relatively high inflation make saving very unattractive, but you rarely hear anyone regretting putting some money into a deposit account that is protected by the Financial Services Compensation Scheme.
- Use your ISA allowance. Or as much of it as you possibly can. The current maximum limit is £15,240 for a mix of stocks and shares and cash, or one or the other. The new Lifetime ISA, which comes in next April, allows people to save up to £4,000 a year tax-free. At the end of each year, the Government will add a 25 per cent bonus. When this ISA is introduced, anyone under the age of 50 (the maximum age limit) would be mad not to use them as a pension complement – they are designed to fill the savings gap.
- As you get older and your retirement age looms, consider moving your investments into lower risk assets, such as cash and government bonds. The returns on these are lower but they are less affected by economic shocks and downturns in the stock market, meaning the investments you have built up over a lifetime won’t suddenly be decimated by 25 per cent over night (this did happen to some pension savers during the financial crisis.)
- Last but definitely not least: life insurance, income protection and accident, sickness and unemployment. These are all designed to cover your family if something happens to you. Premiums will be affected by your health and age and it can be overwhelming to choose, but there are expert brokers, such as Lifesearch, that can help.
Overall, expect the unexpected (within reason, of course).
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Money Means is a news and information series written by independent financial and consumer journalists and experts. FSCS launched Money Means in 2016 to help give people clear and useful information about personal finance, to increase their understanding and confidence when dealing with money.