5 ways to panic-proof your financial life

Life is hectic, and keeping on top of your personal finances can feel like a real headache. Often, it's hard to know where to start. 

But having a clear set of priorities can reduce financial stress and help put you on course for a more resilient financial future, with fewer unpleasant surprises along the way.

1. Keep out of expensive debt

First and foremost, expensive debt is usually bad debt.

Good debt can include a low-cost mortgage, investing in yourself through a student loan, or borrowing to build a successful business. In each case, the debt has the potential to improve your long-term financial position.

Bad debt, on the other hand, is a financial drain with little or no lasting benefit. Examples include high-interest personal loans, persistent overdrafts and credit card debt. These liabilities should be repaid as quickly as possible, clearing the way for the other important building blocks of financial resilience.

2. Build an emergency fund

One of the most important financial foundations is a reserve of readily accessible cash that can be drawn upon in an emergency.

Life has a habit of throwing curveballs, and unexpected events such as a boiler breakdown or essential car repair can take a serious bite out of your finances. Having a reserve fund to fall back on provides confidence that you can deal with problems as they arise.

There is no one-size-fits-all answer when it comes to the right size of an emergency fund. Three to six months' expenditure is often cited as a useful rule of thumb, but the amount you need will depend on factors such as job security, whether you have dependants and how resilient your broader financial situation is. 

Some people prefer to hold a larger cash buffer for additional peace of mind. However, it is possible to overdo it. Keeping excessive amounts of cash on deposit can be seen as a missed opportunity, as savings interest often struggles to keep pace with inflation over the long term.

3. Consider an affordable home when the time is right

Owning your own home can eliminate many financial worries. When you rent, your home is ultimately someone else's investment, and they can choose to sell it, potentially forcing you to move at an inconvenient time.

However, it's important to be realistic about how much mortgage debt you can comfortably afford. Overstretching yourself can place significant strain on your finances, impacting your quality of life and mental wellbeing.

You should also avoid tying yourself down if flexibility is important for your career or personal circumstances. Renting can be an excellent option if you value mobility or are not yet financially ready to commit to a property purchase. Saving for a larger deposit can also give you access to a wider range of mortgage products and often more attractive interest rates when the time is right.

Taking the time to think carefully about what is right for you, given your current circumstances and stage of life, will help support many of your other important financial decisions.

4. Protect your family

In life, it pays to hope for the best while preparing for the worst.

Most people rely on their monthly salary to maintain their standard of living, yet relatively few have adequate protection against losing that income. Insurance policies that provide protection against the financial consequences of death, illness or loss of earnings can be an essential part of financial planning for you and your family.

If you are employed, some of these benefits, such as life insurance or income protection, may be provided through your workplace. However, it is important to understand exactly what cover is available and whether it would be sufficient if the worst happened. Any gaps can often be filled with your own policies.

For the self-employed, the need for protection can be even greater, as there is often less of a safety net if illness or injury prevents you from working.

While these policies may seem like an expense you could do without, they can often be surprisingly affordable, particularly if you are in good health. More importantly, they can provide invaluable financial security and peace of mind, especially if you have not yet accumulated enough savings to support yourself or your family through a prolonged loss of income.

5. Diversify your investments

Whether you are investing for retirement, your children's future or the holiday of your dreams, you’ll want your money to work hard, while remaining resilient during more challenging periods.

Diversification is the key. The best investment is not one, but many. Although, it's tempting to buy whatever has performed best recently, markets can change direction quickly, and sometimes brutally. Owning ten different technology shares is not true diversification. Genuine diversification means combining a mix of asset classes, sectors, regions and investment styles so that you are not dependent on a single source of returns.

Many investors use a variety of funds to achieve diversification, alongside assets such as bonds, property and commodities, including gold. The stock market has historically been one of the most effective ways to build wealth over the long term, but volatility is the inevitable price of admission.

For investors with a lower tolerance for risk, or for those investing over a shorter timeframe, diversification can help smooth the journey. While it won't eliminate losses altogether, it can mean experiencing something closer to a gentle cruise than a white-knuckle rollercoaster ride.

Give your finances a health check

Having a conversation with a financial professional can help you to take control of your finances, giving you freedom and peace of mind. Working together, we’ll help you gain a better understanding of your money.