One pay check from the streets!

One pay check from the streets!

Eye witness news recently ran a story that stated that according to at least one homeless shelter, it is currently the middle class who are most vulnerable to ending up on the streets. The journalist had interviewed quite a few (recently) homeless people and discovered that they were previously middle class but had all suddenly fallen on hard times due to retrenchment/job loss and as a result ended up on the streets (or in informal settlements).

I was asked if I would comment on this and a few questions around insurance and its importance were posed to me. I duly answered them and they ran the story with the sound bites. But later that afternoon while I was out running I was reflecting on the story and suddenly thought to myself that they were the correct answers to the journalist’s questions but the problem was that they were the incorrect questions (and assumptions).

The problem is that if you are retrenched or fall on hard times suddenly, insurance won’t help you out…apart from not really being able to insure against retrenchment, if you are retrenched you will also not be able to afford your insurance premiums if your cash-flow is up the creek and the policies will lapse and be worthless.

On reflection, I think that the “secret” to insuring against this scenario is maintaining a positive cash-flow and having an emergency fund.

As long as you spend more than you earn and increase your debt levels as a result, you are just one (maybe 2) pay checks from ending up on the streets. The reason that the global financial system is in the current mess that it is in is because of too much debt. We have been living one pay check away from bankruptcy for too long. Countries (people) have borrowed more money than they can now afford to repay and they are going to default. And people are going to end up on the streets.

One of the pillars of good financial planning is to have funds for an emergency. One of the major financial risks that we all face is having funds for that inevitable crisis – whether this is a burst geyser, a new gear box for the car, root canal surgery that the medical aid won’t cover or even retrenchment!

The problem though is that most of us are paying off debt. As a result, cash flow is completely out of control – we can’t even make ends meet on a monthly basis and there is no way we have any surplus to put into an emergency fund. My advice is to go back to basics – revisit your budget and see where you are spending your money and how you can cut down your expenses. Start with something like bank fees – even R50/month is R600/year that you could save. Don’t underestimate the importance of a budget and positive cash flow when it comes to financial planning!

The Emergency Fund: the theory is that you should aim to accumulate sufficient funds in an emergency fund to cover 6 months’ worth of income needs. This is the ideal and if you are paying off a bond or debt you probably don’t want this amount of cash sitting in an account earning (significantly) less interest than the debt is costing you. In this instance you would either have less in the emergency fund or if you have an access facility on your bond, use that.

Why 6 months and is that not too much? Yes, you could probably get away with less than that and even 1 month would be better than nothing. But imagine if you were retrenched suddenly – how would you feel knowing that you had sufficient cash to cover your living expenses for the next 6 months? Now that’s the kind of insurance you should be putting in place to keep you from ending up on the streets!

This article appeared in Finweek 28th Oct 2011