Are you really financially secure or do you just think you are?

Recently, I heard a story about a family that unfortunately sounded very familiar. Maxed out borrowing capacity. No personal insurance. One partner gets an illness and can’t work for months. The other is now burnt out caring for their family, and also being the sole earner.

The health crisis alone is a lot to deal with. Add in the financial stress, and it’s quite a nightmare.

If your finances feel like a house of cards, it could be time to act.Credit: Simon Letch

I heard similar stories regularly when I worked at the Cancer Council. I’d talk to people who were impacted by cancer and were, as a result, thrown into financial stress.

Frequently, the financial devastation came as a shock. One minute, everything is fine. Nice house, good income, bills paid on time. Next minute, they’re struggling to get by. How could it all unravel so quickly? How can it only take one shock to bring the house down?

Today, I want to share some questions to ask yourself that can help you avoid this situation:

1. Are you actually financially secure? Or do you just have a high income? Having a high income doesn’t mean you are automatically more financially secure. In fact, many times, a high income can obscure financial insecurity.

No one cares that you have trauma insurance. No one is jealous of your well-thought-out will. You can’t flaunt your very reasonable asset allocation.

Without the financial education to know otherwise, it’s easy to think you’ve done the hard yards by securing a job that pays well. So, your lifestyle speeds up to match your income. You take out the big mortgage for the dream home, you put the kids in private school, you get flashy cars, and nice annual holidays.

However, real financial security isn’t about the size of your house, income, or savings. It’s about how long you could maintain your lifestyle if you stopped receiving your regular income.

How do you do that? With savings and investments.

2. Have you protected against the downside? Or are you only chasing ‘more’? The ‘sexy’ side of finance focuses on accumulating more: more savings, income, investment returns and so on. There’s another side that doesn’t get much spotlight: risk mitigation.

This is the boring stuff you can’t brag about at the pub.

No one cares that you have trauma insurance. No one is jealous of your well-thought-out will. You can’t flaunt your very reasonable asset allocation, next to your friend’s killer crypto returns.

But remember – the bigger the house you want to build, the stronger the foundation has to be. The foundation is built underground, long before you can see anything above ground.

How do you mitigate financial risks? There are entire textbooks dedicated to this, but here are some ideas: mitigate the risk of losing your income due to injury or illness with personal insurance; mitigate the risk of volatility in investing with diversification and asset allocation.

3. Do you understand your finances? Or are you ignoring them? Financial security isn’t just about earning a salary, paying the bills, saving, and staying out of debt. That’s the tip of the iceberg. Unfortunately, that’s where many people stop.

You might tick these boxes and then assume you’re doing okay. You’re getting by fine, you have a busy life, so you don’t think to ask if you might be missing something.

As a result, you never discover the gaping holes in your financial foundation that, if plugged in time, could save you big catastrophes in the future.

• If you don’t know trauma and disability insurance exist, you can’t sign up for them.
• If you don’t understand mortgages, you might take on more financial risk than you realise.
• If you don’t know how important it is to be in the right super portfolio, you might stay in the default fund and lose hundreds of thousands of dollars over your lifetime.

What you don’t know can hurt you. Ignorance isn’t bliss.

There isn’t really a shortcut here. You have to do the sometimes tedious, frustrating, and laborious work of understanding your finances to create real financial security. The good news is – a stitch in time does save nine.

Once you bite the bullet and get your finances in order, that can save you enormous financial stress later on. It’s a little bit of work today, for massive payoffs down the line.

Paridhi Jain is founder of SkilledSmart, which helps adults learn to manage, save and invest their money through financial education courses and classes.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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