How to build a financial safety net

BUILDING a financial safety net is a careful balancing act.

Tucking away a few thousand dollars in case of an emergency is essential to ensuring you don’t topple over when crisis strikes.

However establishing a financial buffer takes time and for those without one it’s time to get started.

There’s no doubt it requires sacrifices to be made and a disciplined approach to get there.

This is how to do it.

GETTING STARTED

Crown Money Management’s chief executive officer Scott Parry says it’s important to have a plan of attack for how to create a healthy buffer, and don’t be disillusioned by how long it may take to achieve.

“It can take you 12 to 18 months to build a financial safety net depending on your living expenses and costs,’’ Parry says.

“It’s an incredible weight off a person’s shoulders once they have three to six months of living expenses and loan repayments up their sleeve.”

He says having the equivalent of three months’ pay saved and being three months ahead on your loan repayments is good.

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Work out your costs of living and see how much you can save towards a financial safety net.

EXAMINE YOUR EXPENSES

Reassessing your expenses is a good way to get your financial buffer underway, AMP financial planner Mark O’Leary says.

“Make sure there are areas where you are not wasting money,’’ he says.

“Look at whether or not there’s a possibility to consolidate your debt and reduce your interest expenses.

“Interest rates are at an historical low so for some people it makes sense to consolidate credit card debt into their home loan.

“Debt never seems to go down if you are paying a high interest rate so look at debt pieces including credit cards, personal loans and home loans and check the rates to see you are getting a good deal.”

He says also look at your lifestyle costs and ways you can cut back on unnecessary expenditure while at the same time still being able to enjoy yourself.

SEPARATING FUNDS

Once you work out how much money you need to save, Parry says setting up a separate account — and one that can’t be easily accessed — is a good way to do this.

Scaling back on your weekly costs and minimising your loan repayments will help you use the excess cash to stash as your financial safety net.

“Reduce your loan repayments by changing to interest-only or make minimum-only repayments on all existing repayments,’’ he says.

“Don’t put the money into a linked account or a Visa Debit account, put it in a separate account.

“We recommend you split it at your point of pay — tell your payroll to take 10 per cent of your pay and put in into a separate bank account.

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It’s easy to get caught out financially if you don’t have a safety net.

INSURANCE

Having insurance is also another vital step to giving yourself a well-rounded safety net, O’Leary says.

“There are plenty examples of people who are underinsured,’’ he says.

“If you are a single person the most important form of insurance is income protection because your biggest asset is your ability to earn an income and you need to protect that.

“If you are a married person or in a relationship with financial responsibilities attached, it could be debt, feeding children or paying for education, life insurance and income protection is critically important.”

Members of super funds have life insurance cover within their super and O’Leary says this is the most cost effective way to pay for it.

*Comparison rates are calculated on the basis of secured credit of $150,000 over a 25 year term. Please note this comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.