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Monday, 6 August 2012

Are you prepared for a crisis?

The world is, as you know, an uncertain place. Anything can happen, including the very worst – a crisis, a shock, even an unexpected death. So, although it’s not a pleasant question to ponder, let’s take the plunge – if you suddenly lost your job, or were unable to work for some reason, or lost your spouse, would you and your family be OK? Do you have enough money set aside to tide you over a few rough months, and have you made provision for even worse scenarios? Are you, in other words, prepared for a disaster?
Now, this may seem like an insulting question; if you’re reading this you’re probably a person who earns a decent salary, saves money for retirement, and is generally on top of your financial well-being.
However, it’s startling how often smart and educated people are unprepared for the unexpected, especially in their financial lives. Some recent data from Visa International’s Financial Literacy Barometer illustrate this – according to Visa, more than 70% of South African survey respondents had only enough savings to cover their expenses for 1.4 months – well below the recommended minimum three-month buffer – and a full 25% of the people who reported that they were not prepared for a personal economic emergency were high-income individuals.
So, even though you’re smart and savvy you might still be one of those people who aren’t quite ready for a disaster. Thus, let’s take some time to consider the key elements of a personal crisis preparedness plan. If you already have one, think of this as a refresher course, if you don’t, think of it as a vital to do list.
1.      Have enough immediately accessible cash on hand to cover at least three months of living expenses
This is the first and most important part of being prepared for a personal financial crisis: an emergency fund. You should have a savings account that you can access without delay (not a 30-day call account, but something you can draw on immediately) that contains enough cash to cover at least three, and ideally six months of regular expenses – rent, groceries, medical aid, school fees and so on. If you keep a budget (which, according to the Visa Barometer, about 50% of South Africans do), it should be easy enough to figure out how much money you’ll need; if not, start keeping one immediately, it’s a good habit.
Keep in mind that you shouldn’t use this fund to cover what we might call routine emergencies like the geyser going on the fritz – you should have a separate fund for unexpected expenses like that. This emergency fund is for when real trouble strikes.
2.      Have enough life and disability insurance to safeguard your own and your family’s future
I know that insurance isn’t the sexiest topic in the world, and it can seem like an undue burden to pay for something month after month that you never seem to use. However, when crisis strikes, insurance is absolutely essential, particularly if you’re the primary breadwinner for your family, and it’s shocking how few South Africans have adequate insurance.
According to a 2010 study by the Association for Savings and Investment South Africa (ASISA), the average South African income earner is underinsured by R600,000 in the event of death and by R900,000 in the event of disability. The study, which followed a previous 2007 study, revealed that South Africans need to spend, on average, an additional 2.4% a year of their personal income on life cover and an extra 1.5% of their income on disability cover.
Make sure that you aren’t one of the underinsured; as unpleasant as it is, sit down with a financial planner and work out exactly how much life cover you need to make sure your family can maintain their standard of living, and how much disability coverage you need in case you are, for whatever reason, unable to work.
By doing these two simple things, you’ll go a long way towards insulating yourself and your loved ones from life’s ups and downs. No one likes to think that something terrible could happen to them, but terrible things do happen, and luck favours the prepared. Make sure that you’re prepared.

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