John threw back his head, letting out one of those belly-laughs he was so famous for.
The lights of the nearby Christmas tree glistened in his eyes, slowly turning from red, to green, to blue.
It was cold and dark outside. The birch tree outside the window tap-tapped on the glass as it rocked in the wind.
But in here it was warm and light. We were among friends.
And John was on top form with his dreadful puns.
What you won’t know is that just six weeks ago John had to go into hospital for an operation. Don’t worry – everything went as planned and John is absolutely fine. But he was told he’d need to take at least a month off work – quite possibly more.
And at John’s employer the sick pay on offer is meagre to say the least.
For many people in his situation, taking a couple of months of work with little or no salary would have been a major disaster. Even worse as Christmas rolls around and the present-buying frenzy begins.
But not John. John is smart. John planned well ahead for such eventualities, and now he’s reaping the benefits.
Because as John is testament, if you’re going to suffer from illness, an accident or get laid off, the last thing you want to do is worry about money. No, you want to be able to focus 100% of your effort on just getting back in the saddle.
John protected himself – which is why he was able to laugh so easily on that fateful night between Christmas and New Year.
Today I’d like to tell you how…
1) Become Debt Free
When your income risks dropping rapidly and precipitously, those individuals who are most affected are those with the highest fixed expenses.
The mortgage, the credit card debt, the car finances. They’re the things that can make or break your budget. Food can be economized on. You can stop going out.
But unless you want to land yourself in some seriously hot water then you can’t take a couple of months off paying your credit card bill.
For this reason, the first step to protecting yourself financially is eliminating as much of your debt as you possibly can. This instantly reduces your fixed monthly expenses and frees up cash for a rainy day.
Truth be told, John “doesn’t do debt” as he loves to tell me. If you do, you’d be well advised to start putting a plan in place to become debt free as soon as possible.
2) Grow An Emergency Fund
The second stage in protecting yourself financially is to create an “emergency fund” – a stash of cash that you can access at a moments notice in times of crisis.
Quite how big you choose to make this pot of money is up to you. Some people opt for a month or two of their typical spending. Others go far more hardcore and save a five-figure sum.
The fact is though that as soon as you’ve paid off your debt your next priority should be socking way at least a few month’s worth of expenses in a separate account. This emergency fund means that you can withdraw “extra” money if and when you need it.
In other words an emergency fund should be considered instrumental in protecting yourself from life’s ups and downs.
3) Insure Your Income
We all insure our cars and our homes, but were you aware of all the other things you can insure? Known either as Income Protection Insurance or Lifestyle Protection Insurance, it is now possible to insure yourself against loss of income thanks to accidents, illness or redundancy.
You simply select how much of your income you’d like to insure, for how long, and how soon you’d like the policy to kick in and you’re all covered.
In reality most income protection policies won’t insure 100% of your income – the number is more likely to be in the 50%-70% range. Still a healthy chunk of change, but probably not what you’re living on right now.
By having no debt, however, you’ll be in the perfect position to rapidly reduce your expenses without pain and live perfectly acceptably on that 30% pay cut until you’re able to go back to work full time.
Oh and the emergency fund? Well most income protection policies don’t kick in immediately. Depending on the terms you agree you’ll normally start receiving your insurance payments anything between one and three months after you first initiate the claim. Your emergency fund is therefore to cover the “shortfall” until your insurance starts paying out.
As we pour ourselves another glass of single malt John, his wife and I reflect on how very different things could have been. Indeed, on how such a situation would have blown me financially just a few years ago.
But not John. He got prepared, he’s had six weeks of relaxing after his operation without a care in the world and now he’s enjoying Christmas just like every other year.
Be like John. Protect yourself financially. You never know when you’ll benefit from your plans, but when you do you’ll be surpremely grateful you put in the small amount of effort required.