How to deal with financial uncertainty

Financial uncertainty-299A wise man once said: ‘the only constant in life is change’. Of course, a part of change is uncertainty. While you may not be able to prevent yourself from all forms of uncertainty, you can surely prepare well in advance for any kind of financial uncertainty that may occur in the future.

1. Establish an ‘uncertainty fund’

Similar to an emergency fund, an uncertainty fund is a sum set aside to meet life’s unexpected occurrences. This will help you rest easy, safe in the knowledge that you’re catering for every eventuality.

2. Appropriately insure yourself, your things, and your income

Appropriate risk management is usually best achieved by establishing suitable insurances. This offers you peace of mind and means you can sleep-easier at night.

3. Factor uncertainty into your plans

This could be by creating a buffer to absorb some of the shock of any changes. This could mean that if you’re working towards a saving or investing goal, why not add a buffer of an extra 10%? For example, if you have a goal to accumulate $10,000 for something important to you, why not aim for $11,000? – That way, if the unexpected occurs (such as the price goes up before you’ve amassed enough) you already have enough to meet the new price. Better still, if the price or expense remains the same, you’ll either reach your goal sooner or have funds left over!

4. Spread the risk

Think about it like this:

  • If you have all your wealth in one boat, a big storm can wipe it out.
  • If you have all your wealth spread among one fleet based in the same port, a storm will probably wipe out much of the fleet.
  • If you have your wealth spread across many fleets right across the globe, even the worst storm will only impact a small part of your wealth.

This means you need to diversify your overall portfolio of investments across a broad mix of asset classes and locations.

5. Define what you can and can’t change, then focus on what you can influence

As a snapshot of change, it’s worth noting that just in the last few months New Zealanders have been subject to the following major financial changes:

  • Record low interest rates,
  • Legislative changes to KiwiSaver, including different assistance available to first home buyers,
  • Tax alterations, such as increased petrol taxes and significant tax changes for property investors, and
  • Trust law changes.

No doubt, there are more changes to come. In addition to the examples above, another thing you can’t change is the rate of inflation, which steadily reduces the value of every dollar you have. No-one can predict the inflation rate over the next 15 or so years, which can have a big impact on your financial goals.

Knowing the difference between the things you can control and the things you can’t is critical to manage financial uncertainty. Focussing on what you can’t control often takes our energy and attention away from what you can control. To get the best results in anything, your focus needs to remain on what you can influence, which is usually the ‘input’, such as how much you contribute to investments.

The bottom line

Let’s recap with the top five ways to deal with financial uncertainty:

1. Establish an ‘uncertainty fund’

2. Appropriately insure yourself, your things, and your income

3. Factor uncertainty into your plans

4. Spread your risk

5. Define what you can and can’t change, then focus on what you can influence.