Future Proofing your Finances – How Life Events can Affect your Financial Wellbeing

If we have learnt anything from the last two years, it is that life-changing events can happen to anyone, at any time.  The pandemic lead many of us to re-evaluate what we took for granted, as we confronted the reality that none of us are immune from life’s challenges.  

Life events, even happy ones such as a marriage or the birth of a child, create a financial burden and this can have a huge impact not only on our financial well-being but our well-being more broadly.  Coupled with this, recent research by Prudential shows that nearly half of Americans are struggling with financial hardship and a UK study found that “an estimated 15 million people in the UK (28%) had experienced at least one life event that was either “very difficult” or “not possible” to save for using existing income and savings, during the past two years.”.  As the cost-of-living crisis looms, the financial effects of these life-changing events, from relationship breakdown to unemployment, from caring responsibilities to bereavement, are going to become increasingly apparent.  

It is often women, younger people, those from a less affluent socio-economic background and people from ethnic minorities who are more likely to experience a life event that has a negative effect on their finances. This might result in them having an over-reliance on credit cards or high interest loans to manage day-to-day expenditure, missing bills or debt repayments or cutting back on essentials such as food or heating.  A large number of these people will not seek assistance or support with their debt, either as a result of not knowing whereto turn, the perceived shame or stigma of financial debt, or the negative perceptions or failings of the benefits system.

We look below at some of the key life events that experts agree can affect financial wellbeing and how these can be “future proofed.”

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Attending college or university

The cost of tuition is high and rising.  For those who are not fortunate enough to have family support or savings to rely on, consider what government aid or student loans may be available.  Look into whether there are any scholarships or bursaries or awards that could be applied for (whether through the institution itself or through local charities or groups).  Consider supporting academic work with paid employment or completing your studies on a part time basis.  Whilst student debt can be a long-term commitment, remember too that graduates are often higher paid than their non graduate peers and so the investment may be worthwhile over time.

Buying a house

Property ownership continues to be an ultimate life goal of many young adults.  However, the financial down payment required to get a foot on the property ladder can seem unachievable.  Whilst starting your savings early will be key to amassing a sufficient deposit, think too about your financial health.  Having a good credit rating will be imperative to being able to obtain the best mortgages so have a look at your financial position early, try to pay off credit cards regularly and ensure you do not go into arrears on any debts.

Getting married (and divorced)

If there is one thing that can be guaranteed to have an impact on your finances, it is relationships.  Weddings are notoriously costly, and most people will need to save for months or even years in order to afford their dream day.  Marriage itself, however, can have a stabilising effect on finances.  Pooling your resources and running one household instead of two can allow for increased saving and couples often benefit from tax, pensions, benefits and insurance related advantages.  There are often multi person discounts available on benefits and other purchases that should be utilised.  

Conversely, a separation or divorce can have a catastrophic impact on financial well-being.  Trying to support two households where there was previously only one is challenging from both a capital and an expenditure perspective. Not only this, but any debt within the relationship will often be shared.  The extent of the impact very much depends on the individual couple but trying to agree as much as possible, reach an amicable solution and minimise costly legal fees will offer the best opportunity for weathering the storm.  If you have the chance, future proof any separation with documents such as postnuptial or cohabitation agreements (always take local legal advice on your specific location and circumstances).

Starting a family

One of life’s happiest events but also one of the most expensive.  Numerous publications have expounded the cost of raising a child and recent studies suggest that the cost of raising a child born in 2022 to be c.$275,000 to age18 (without college fees!).  This is compounded yet further if one parent gives up work or takes a salary cut to care for the child.

However, these costs can be (at least in part) reduced or offset.  Look into benefits, tax credits or support packages that might be available for working parents.  Consider with your employer how you might be able to change your hours at work whilst still meeting your work responsibilities and ask if they provide any benefits.  Set up a savings plan (if affordable) to guard against future costs and look into insurances and protections such as income protection to guard against any unforeseen events.  Trade childcare with other parents or family and do your research early on to find the best available options.

Retirement

How much retirement affects your wellbeing depends on how much you have saved for this period of your life.  Investing in retirement products (401(k)s, IRAs, pensions etc.), diversifying your assets and preparing from an early age is key.  Take advice as to how your income needs might increase as you age, as well as your medical and care costs.  Pensions are often supported by employers, meaning that you are losing out on their contribution if you do not invest and the earlier you start, the more chance there is that the fund will be sufficient in the longer term.  Also consider downsizing your debt and pay off any mortgages whilst still working. It is important to plan carefully and set realistic goals so that time is on your side.

Serious illness

Whilst it may be impossible to prevent the emotional trauma of a serious illness, being financially prepared can alleviate some of the practical and financial burden.  You will need to think about the cost of your long-term medical treatment, how you will fund support if you are no longer able to care for yourself and income replacement or enhancement if you are no longer able to work or have to curtail your responsibilities. Look into life insurance and critical illness policies.  Consider what benefits and subsidies might be available to you and whether there are tax exemptions or discounts you can apply for.  Always try and have an emergency fund for when policies do not cover the full cost of treatment or for excesses that must be paid.

Bereavement

No-one likes to talk about death, but if we invest the time now in discussing and implementing financial plans and policies then it makes it significantly easier for our loved ones after our passing, when they are also in the process of grieving.  There are many things you can do in order to prepare your family financially and logistically for when you pass away.  If anyone is dependent on you for funding their living expenses, then consider having a life insurance policy for them to replace that income in the event of your death.  Make sure resources, documents and information are all readily available and documented and that your loved one save enough to tide them over in the initial months. Consider making a Will to document what is to happen to your assets and who needs to be supported after your passing.

The unexpected (natural disasters, pandemics)

From natural disasters like floods or wildfires to public health or ecological crises, there are a myriad of other circumstances for which you should be financially prepared. Again, the key is proper financial planning.  First, try and automate systems so that you are not reliant on “in person” visits to the bank or other institutions.  Secondly, try and build up an emergency savings fund (3 – 6 months’ salary) to supplement your income, or to replace it in a worst-case scenario. Make sure this is easily accessible and not tied up in a long-term investment.  Consider specialist insurance products (flood protection etc.), ensure your other insurance policies are up to date and be aware of the limits of their cover.  

Numerous studies show that connections between life events and health—including stress, sleep, mental health, depression, physical conditions and weight management — could not be clearer, and therefore you need to take steps to try and manage these financial stressors and put action plans and coping techniques in place. Navigating large life events and having plans in place to transition through them will not only positively impact your financial wellbeing but, also, your broader physical and mental wellbeing too.