How to budget for an uncertain future
6 min read
Budgeting and saving for an unknown, distant future is a challenge at the best of times. But the global pandemic has forced us to confront the importance of accepting uncertainty, especially when it comes to our finances.
Here’s what you can put in place to get some financial security, protect your future self and budget for the unexpected.
Save for a rainy-day fund
Financial advisers usually suggest saving at least three to six months of essential outgoings. That includes things like rent or mortgage, bills, transport or childcare; the stuff you couldn’t cut back on in an emergency. But for many this won’t be enough.
Think about what you need:
- What are your personal circumstances and how would you cope if you were made redundant?
- Would you get redundancy pay, or could you manage for a while with, for example, a partner’s income?
If you are self-employed you might decide you need more cash on hand to tide you through a month or two of irregular work.
Review your bills and accounts
Saving can be tricky if you are trying to put aside only what is left at the end of the month.
You need to decide how much you can afford to save upfront, by looking at your earnings and outgoings, dividing the latter into unavoidable and non-essential.
Subtract the unavoidable from any money you have coming in. The difference is what you have left to divide between all other spending and saving.
Move your allocated savings out of your account when your salary comes in into a separate place where you aren’t tempted to spend them.
Review all your bills, especially the recurring direct debits on your accounts that it is easy to ignore.
Have you shopped around for energy, insurance, mobile phone, broadband or mortgage deals recently?
If not and you’re at the end of a deal, make sure you do, you’ll always save money.
Pay down debts
Often, we chip away at credit card or bank loan debts while saving, because psychologically it feels good to have the security of cash savings. But the interest rates on credit cards and bank loans (student loans and mortgages are different) are much higher than the pitiful return you can earn on savings right now.
Make sure you:
- know what the interest rates are on any debts you’ve got
- understand the power of compound interest (how it makes savings grow but also outstanding debts, at a scary pace)…
- … and put a plan in place for how you are going to pay down your debts.
The charity StepChange offers excellent, free and anonymous advice if you feel you need help.
Too many people ignore debts until they get out of hand, wasting money and a lot of emotion in the process. Don’t be afraid or ashamed to ask for support.
Don’t forget about the long term
When budgeting and planning how much you can or want to save, don’t forget to think about the longer term.
If you are employed and earning more than £10,000 you will have been enrolled automatically into a company pension. Have you ever looked at how much you’re paying in, where it is invested, and what kind of sum you can expect on retirement?
Engaging with all this as soon as possible means you’ll have to spend less time in the future topping up retirement savings. The power of compound interest, remember?
Have you thought about life insurance?
What would your family or children do financially, if you were to die, or become too ill to work? Not enough of us ask ourselves this question.
Life insurance is designed to offer either a lump sum of money, or regular payouts, to those you leave behind if you were to die younger than expected. Your dependents might need the money when you’re gone to cover the mortgage, education or day to day expenses.
If you are self-employed it is particularly important to consider what would happen if illness or disability strikes. Income protection insurance is designed to substitute all or some of your earnings if you are unable to work for health reasons.
Seek advice before opting for the first, or cheapest, life, critical illness or income protection policies. Make sure what you are buying is actually suitable for you, your family and your circumstances. If it’s not, you may only realise when it’s too late.
Laura Whateley is a freelance writer and author of Sunday Times bestselling book Money: A User's Guide. She has written for a wide variety of publications including The Times, The Guardian, Grazia, Refinery 29, Elle, Red and Stylist.
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