It's not just today's bills that you need to budget for - you also need a strategy that will enable you to deal with unexpected bills and continue to meet your living expenses if your income falls because of sickness or unemployment.
- Aim to clear your debts - especially if you are at risk of getting into serious debt. Paying off expensive overdrafts and money you owe on credit cards is a form of saving and makes a lot of sense because the interest you pay on borrowing is invariably higher than interest you earn on savings. (The exception to this is a student loan from the government-owned Student Loans Company). Being in debt makes you more vulnerable to a sharp drop in income than if you were financially solvent.
- Take out buildings and contents insurance. Insurance policies of this kind will protect you against the cost of dealing with damage or loss caused by things beyond your control, such as storms, floods, theft, or fire. Bear in mind that these policies aren't a maintenance contract - they won't pay out when the boiler breaks down or your washing machine gives up the ghost.
- Build up your savings. A high priority once you have cleared debts is to build up a cash fund that you can fall back on. How big the fund needs to be depends on what you want it to do for you and also on the other measures you have available to protect your income. It could be enough to meet the cost of household repairs, or six months' worth of rent or mortgage payments, or as much as a year's after-tax salary.
- Check what financial protection you have. Many people believe that the state will provide in times of trouble. It may offer some financial help, but state benefits for unemployment and inability to work because of illness or injury are unlikely to cover all your expenses.
- Building up sufficient savings is one way of making sure that you could cope. Another way is to buy income-protection insurance, which pays a replacement income if you suffer a long-term illness or disabling injury. If you have a mortgage, you could take out mortgage payment protection insurance. However, if you are an employee, first check the terms of your employer's sick pay and redundancy schemes to see whether buying your own private insurance is strictly necessary.
