How would you survive if a serious illness or injury meant you lost your main source of income?
Not long is generally the answer, something we find is frequently borne out when meeting clients – especially younger ones.
Worse still, there is a tendency for self-delusion, highlighted in a new financial resilience report from Legal & General entitled Deadline To Breadline.
On average, consumers think they could last 60 days if it came to the crunch. However, calculated on their actual savings and spending patterns, the figure is just 19, a mere 14 if you live in the West Midlands.
Cutting back to absolute essentials does produce some breathing space, but not much. Food, heating, fuel, holidays, eating out and leisure are taking a pounding,
Furthermore, there are nearly two million adults who have no money left at the end of each month, a rise of 330,000 in the last two years.
Asked how they would cope, households cited savings, picking up odd jobs, benefits or family and friends … but, in many cases, this is not that easy.
Imperative then to be prepared. Start building up short-term savings – aim for six months bill money in the bank. Think about insurances.
Bernie Hickman, CEO of Legal & General Retail, said: “Our report reveals some worrying trends, with many workers overly optimistic about their ability to cope financially if they were suddenly to lose their income. At the same time, a large number of people are reducing their savings, to make their money go further, or contemplating removing the safety nets they have in place.”
Three-quarters of those affected by both Covid and the rising cost of living trimmed contributions to their savings, more than one in three in the case of pensions. Indeed, nearly 17 million people aren’t currently contributing to a pension, albeit many of those earning £50k+ do have alternatives plans, for example using other investments or property to fund retirement.
The report goes on: “Adding debt and savings into the mix reveals that many have even less financial resilience than their daily spending would suggest. The average household has £2,431 in savings and is £610 in debt (not including mortgages or student loans), so ‘real’ savings of £1,821, but 37 per cent have less than £1,000 savings including 16 per cent who have no savings at all. Meanwhile, 64 per cent of households have significant debt, often creating negative ‘true savings’ (savings minus debt). And, of course, that debt will still need to be paid off.”
Insurance products can help.
Income protection insurance provides regular sums if you’re unable to work due to illness or an accident. It pays out between 50 per cent and 65 per cent of your income until you can start working again. Costs vary depending on age, occupation, whether you smoke or have smoked, your weight and family medical history.
Mortgage payment protection insurance (MPPI) typically starts to cover your mortgage repayments three months after your earnings stop and continues for up to 12 months.
Payment protection insurance (PPI), sometimes called Accident, Sickness and Unemployment (ASU) cover, kicks in to help you meet loan commitments by paying out a set amount for up to 12 or 24 months.
The trouble is, as L&G notes, “people generally don’t have an insurance mind-set”.
Also, the PPI mis-selling scandal, which began around the turn of the Millennium and led to the largest consumer redress scheme in British history, with over £38 billion compensation to claimants, put many off the whole sector.
A pity because, when used correctly and you shop around, these can provide invaluable protection.