Our Protecting our Families report found that the UK public have a very optimistic view about their finances. While families think that they could last around five months if they were to lose the main breadwinners’ income, the reality is that almost half (45%) would last less than a month1.
In the all-time number one selling personal finance book, ‘Rich Dad Poor Dad’, the author Robert Kiyosaki describes wealth as: the number of days you can survive without psychically working (or anyone in your household physically working)2. Although it may seem like an unreachable goal, there are so many ways to get to a stage where you’re no longer worrying about redundancy or illness. This step-by-step guide will ensure you’re prepared for any eventuality, and can weather the storm if you are affected by income loss.
Living within your means
The first step to considering yourself a wealthy person is to assess where you currently stand financially. After all, how can you put something away when you’re paycheck to paycheck. That means it’s time to evaluate, and work out where you can cut back.
Income and expenditure
It may seem obvious, but many people don’t weigh up their income with their expenditure, or really analyse their spending. Put simply, you can’t build wealth if you’re spending more than you’re bringing in, and the importance of a real (and brutally honest) budget is not to be underestimated.
Create healthy habits
There are many theories related to how long it takes to create a habit, but the general consensus is that the more you do something, the easier it becomes. If you set yourself rules in terms of cutting back, and rigorously stick to them, eventually it’ll become second nature. The rules can be as simple as ‘never go shopping hungry’, or setting a limit on how much you can spend on going out each month, but they will get you into the swing of living more carefully.
Look after the pennies
Some people overlook the invisible spending of smaller purchases, subscriptions, and other things leaving their bank account. But, it’s not just a cliché that looking after the pennies means the pounds will look after themselves, as it all adds up. If you put that daily £2 spent on elevenses or coffees towards paying off debt or saving, your money is already working harder.
Getting out of debt
Once you’ve managed to get your outgoings under control, the next thing you need to do is rid yourself of debt. Whether your debt is large or small, burying your head in the sand is not an option. Calling up your creditors and putting actionable plans in place is what will get you back on track.
Prioritise debt over saving
This can’t be emphasised enough. When you’re accruing interest on credit cards, loans or other forms of debt, you’re losing money. Before you start to build your personal assets, remove your liabilities which cost far more than you’ll earn in interest from investments or savings.
This means cutting up credit cards, freezing loans so you can’t take any more, and calling the bank to remove your overdraft. As you’re building wealth by spending less your desire to splurge will lessen, but in the meantime you need to get yourself out of the ever-so-easy debt cycle.
Saving for a rainy day
Once you’ve removed the barriers holding you back from creating new wealth, you have to consider how to put something away. You may choose to invest that money, or put it in an ISA or savings account, but even on a tight budget there’s a myriad of ways to do this.
Income protection and critical illness cover
Building a larger pool of money in case of income loss is a steady process, but in the meantime you need to be protected for the worst. Income protection and critical illness cover are two ways to do this, and can give you peace of mind while you tighten your belt and get building assets.
Almost one in five (18%) families feel that they are unable to cut back at all to free up extra money3. If reducing spending elsewhere isn’t an option, adding an extra stream of income is the best way forward. Think of this money as excess, and outside of your daily budget. Then put that into a savings account or ISA that you can’t access on a whim. Check out our guide to diversifying income to get started.
Create a 5 year plan
If you want to have £10,000 in the bank in five years, that’s something to look forward to and aspire to. Then, when you break down into the fact that that’s under £200 a month, you can start to work towards your larger goal in small steps.
There is no get-rich-quick scheme to build your wealth, but a mixture of living within your means, and providing you and your family with protection for the hard times will steadily improve your financial health.
How to create a household budget
Monitoring your income and expenditure is key to building wealth. Learn how to take the first step and budget for your family.
Boost and maximise your human capital
Invest in yourself and improve your job security with our guide to building skills and achieving career goals.
Additional SourcesAviva Protecting our Families Report March 2017
Rich Dad Poor Dad, Robert Kiyosaka, 1997
Aviva Protecting our Families Report March 2017