How to make the unexpected part of your financial plan

When you set out how to reach your financial goals, you might think about the steps you need to take. Just as important could be considering how the unexpected might affect your financial plan. Read on to find out how the unexpected may affect you and how an effective plan could keep you on the right track.

Personal and economic events could derail your financial plan

Unexpected events in your life could derail your financial plan or mean that adjustments are needed to ensure it remains suitable for you. Personal events like getting a divorce or becoming too ill to work may affect both your short- and long-term finances.

For instance, a divorce may have an immediate impact on your household income, so you might need to adjust your expenses. In addition, it could affect long-term plans. According to research from the Nuffield Foundation in November 2023, two-thirds of divorces bypass the legal system, which can leave many partners, particularly women, worse off if some assets, like pensions, are overlooked.

Large economic events could also affect your financial plan.

Recently the effects of the pandemic and the following period of high inflation have highlighted how unexpected global events might affect your finances.

Indeed, according to the BBC in April 2024, 7.4 million UK adults are struggling to pay bills due to high inflation, and 1 in 9 had missed a bill or credit payment in the six months to January 2024 as a result.

Even if your budget has been able to absorb the rising cost of living, it might have affected your finances in other ways. For example, you may find you need to save more money for retirement to achieve the same standard of living.

Unexpected events aren’t always negative either. Some could lead to positive changes in your life or finances. Perhaps you experience a surprise windfall or are planning to get married.

There are several ways a tailored financial plan could help you prepare for the unexpected.

A financial plan will consider your resilience

Often, one of the key steps to building a strong financial plan is to consider what would happen if you faced a financial shock, and then assess how you could reduce the impact.

Common solutions include building an emergency fund so you have finances to fall back on to cover short-term expenses, and taking out appropriate financial protection that would pay out under certain conditions. Steps like these could keep your financial plan on track if you experience an unexpected shock, such as losing your job or being unable to work after an accident.

A financial plan could help you understand the impact of unexpected events

In some cases, it is obvious the effect an unexpected event will have on your finances.

If you’ve dipped into your emergency fund to repair your car, you know how much the bill was and can create a plan for building your savings back up.

However, it’s not always straightforward. For example, if you need to take a year off work because you’re ill, you might pause your pension contributions to help you manage your short-term finances. That could mean your employer also stops their contributions. As your pension is usually invested, pausing contributions could affect the returns and you could face a shortfall when you retire.

As part of your financial plan, you could even model questions you might be concerned about, so you’re able to prepare for them. For example, you might assess what would happen if your:

  • Investments didn’t deliver the returns expected before you retire
  • Income stopped due to an illness
  • Outgoings increased sharply due to rising interest rates.

A financial plan could help you assess the implications of an unexpected event and how you respond to it.

Regular financial reviews could help your plan continue to reflect your circumstances

Following an unexpected event, a financial review could help you assess the impact and decide how to respond.

Making regular financial reviews part of your plan allows you to assess how unexpected events have affected your long-term finances, and what steps you could take to get back on track. By identifying potential issues sooner, you might be in a better position to reduce their effect or you may have more options when deciding how to react.

Get in touch to talk about your financial plan

If you want to discuss how you can make the unexpected part of your financial plan, please contact us. Taking the unexpected and factors outside of your control into account may help you feel more confident about your financial future.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

The Financial Conduct Authority does not regulate cashflow modelling.

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