Most families plan for the costs they can see coming, such as the mortgage, the weekly shop, school uniforms and the summer holiday. These are the expenses that shape your monthly household budget and your longer-term goals.
However, it’s much harder to plan for the events nobody sees coming. A serious illness, redundancy or the death of a partner could all knock your family finances off course within weeks.
And many households have very little to fall back on. The FCA’s Financial Lives survey found that 13.1 million UK adults (24%) had low financial resilience. That means they were already in financial difficulty, or could quickly find themselves there if something went wrong. Worryingly, one in ten respondents said they had no cash savings at all.
While you often can’t predict when a financial shock might happen, you can do a lot to limit the damage it causes.
This article looks at the shocks most likely to affect families, the practical steps you can take to prepare for them, and how professional financial advice can help you put the right safety net in place.
Why financial shocks hit families so hard
Families tend to run with less slack than other households.
One or two incomes often support several people, and a large share of that money is committed before the month even begins. Mortgage or rent payments, childcare, car finance and household bills don’t pause because your circumstances change.
Many families also rely heavily on one main earner, often without realising how exposed that can leave them. If most of your household income comes from one person, losing it for even a few months can leave a gap that your savings alone won’t fill.
The bigger risk is that a short-term problem can create long-term damage. Without a plan, people often reach for whatever money is closest to hand. That might mean running up credit card debt, selling investments when the markets are down or dipping into a pension years earlier than intended. Each of these can set your long-term plans back much further than the original shock.
There’s an emotional cost, too. Money worries tend to land at the same time as illness, grief or job uncertainty, when you have the least capacity to make clear-headed decisions. Having arrangements in place beforehand can mean you have fewer difficult choices to make at the very moment you’re least able to make them.
The shocks most likely to affect your family
Financial shocks come in many forms, but some affect families more than others:
- Serious illness or injury – If you’re employed and too unwell to work, Statutory Sick Pay is currently £123.25 a week and lasts for up to 28 weeks. Some employers pay more, but often for only a limited period. If you’re self-employed, there’s no sick pay at all, and a long illness could leave you with nothing coming in.
- The death of a partner or parent – Beyond the emotional impact, losing a partner or parent can leave a significant hole in your household income. If the person who died also provided childcare or ran the home, replacing that support can be costly.
- Relationship breakdown – Divorce or separating can have a similar effect to losing a partner. It can also mean the income that ran one household suddenly has to fund two, with legal costs on top.
- Redundancy or a drop in income – Statutory redundancy pay is capped and based on your age and length of service, so it rarely lasts as long as it takes to find a new role on a similar salary. If you’re self-employed, losing a major client can have the same effect.
- Rising living costs and mortgage rates – A jump in your monthly mortgage payments when a fixed-rate deal ends can put real pressure on a family budget, particularly when energy and food prices are climbing at the same time. Many families realise how stretched they are only when the new payment arrives.
- Supporting an elderly relative – Many people find themselves helping with a parent’s care costs or cutting their working hours to provide care themselves.
None of these are unusual, and most families will face at least one of them at some point. Planning for them isn’t pessimistic. It’s practical. Here are some of the steps to take:
Build an emergency fund
An emergency fund is your first line of defence against financial shocks. It can cover the immediate costs of an unexpected event and buy you time to make sensible decisions rather than rushed ones.
The usual guideline is to hold between three and six months’ essential outgoings in cash, to cover your mortgage or rent, bills, food, transport costs and any debt repayments. If your family relies on one main earner, or your income varies from month to month, you might want to aim higher.
Keep your emergency fund somewhere you can reach quickly, such as an easy-access savings account or cash ISA. This isn’t money to invest, as you don’t want to be forced to sell at a loss when you need it most. Check that your provider is covered by the Financial Services Compensation Scheme, which currently protects up to £120,000 per person, per banking licence.
If building several months’ worth of cash buffer feels out of reach, start small. Set up a standing order for the day after payday, so the money moves before you can spend it. You could also direct part of any pay rise, bonus or tax refund towards it.
Keep the fund separate from your everyday accounts so it doesn’t get absorbed into your day-to-day spending.
Put the right protection plan in place
An emergency fund can carry you through a few months. Protection insurance covers the bigger, longer-lasting shocks that savings alone can’t.
Life insurance pays out if you die during the policy term. Level term cover pays a fixed amount, which suits families who want to leave a lump sum for their partner and children. Decreasing term cover reduces over time in line with a repayment mortgage, making it a cheaper way to make sure the debt is cleared.
Family income benefit is a type of life insurance that pays a monthly income, rather than a single lump sum, until the end of the policy term. Because the total it could pay out falls each year, it’s often more affordable than level term cover. A regular income can also be easier for a grieving family to manage.
Critical illness cover pays a tax-free lump sum if you’re diagnosed with a specified serious condition, such as certain cancers, a heart attack or stroke. It can help you pay off debts or cover your costs while you recover.
Income protection is the most overlooked cover of all. It replaces part of your income, usually between 50% and 70%, if illness or injury stops you working, and keeps paying until you return to work or the policy ends. If your family depends on your salary, it’s often the most valuable cover you can hold.
Finally, ask your financial planner about writing your life insurance policy in trust. This means a payout can reach your family quickly, without waiting for probate, and will usually sit outside your estate for Inheritance Tax purposes.
Keep your plans and paperwork in order
Insurance and savings can help only if your family can reach them when they need to.
So, make a will, or update your existing one. Without one, the intestacy rules will decide who inherits what, which might not reflect your wishes.
Set up lasting powers of attorney for your finances and your health. These allow someone you trust to manage your affairs if you lose the capacity to do so yourself.
Check the beneficiary nominations on your pensions and any death-in-service schemes, particularly after marriage, divorce or the arrival of children.
And make sure your partner knows where to find your key documents, policies and account details.
Reduce your exposure to debt and rising costs
The less your family has committed each month, the easier it is to absorb a financial shock when it comes.
So, start by paying down your most expensive debts, such as credit cards, overdrafts and personal loans. Clearing these can free up money each month and remove a pressure point if your income falls.
Keep an eye on when your fixed-rate mortgage ends. Most lenders let you secure a new deal around six months beforehand, giving you time to compare your options and avoid moving onto a higher standard variable rate.
And think twice before taking on new commitments, such as car finance, that leave little room in your budget. A bit of breathing space each month can give you far more options should the unexpected happen.
How can Glenrose Financial Planners help?
Nobody can stop financial shocks from happening. But with the right savings, protection and paperwork in place, your family can recover from them far more easily.
At Glenrose, our Derby-based advisers can review your existing protection plan, savings and workplace benefits, identify any gaps and recommend cover that suits your family and your budget. We’ll also look at your mortgage, investments and estate alongside your protection, so each part of your financial plan supports the others. And as your circumstances change, we’ll review your plans with you to keep them on track.
Book a consultation with one of our advisers today to find out how we can help you protect your family’s financial future.