Can your financial plan handle the unexpected?

• A financial plan needs to account for both the expenses you know are coming and those you can’t predict.
• Emergency savings can provide a buffer if your income stops, but the familiar three-to-six-month rule won’t suit everyone.
• Planned expenses and emergency savings should be kept separate, even if the money is invested in similar ways.
• Income protection and severe illness cover solve different financial needs and can help prevent an unexpected event from derailing longer-term investments.
• Your income is one of the engines behind your wealth creation. Protecting it can be as important as deciding where to invest it.

Most of us would rather think about growing our wealth than contemplate what might knock it off course.

Retirement contributions, investment returns and long-term goals tend to get the most attention. Retrenchment, an extended period away from work or a serious illness is often overlooked.

But a financial plan built only for the life you expect leaves a fairly obvious gap: life rarely sticks to the script.

Episode four of Mastering the Basics webinar series takes a step back from wealth creation to look at the foundation beneath it. The challenge is to make sure a financial shock today doesn’t force you to sacrifice the wealth you have been building for tomorrow.

What could force me to raid my investments?

The answer isn't always an emergency.

Darren Behrendt, Head of Invest & Insure at Investec, separates shorter-term financial needs into two categories: planned and unplanned.

School fees, a home deposit or a large family holiday may put pressure on cash flow, but they are foreseeable. An unexpected loss of income, accident or serious illness is different.

Both require money. But they shouldn’t necessarily come from the same pot.

Planned expenses can have their own savings and investment strategy, based on when the money will be needed. An expense due within a few months may require readily available cash. With a longer horizon, other short-term investment options may be appropriate.

The important point is to plan for these expenses rather than allowing them to consume money set aside for something else.

How much of an emergency fund is enough?

Three to six months’ worth of income is a commonly used starting point for an emergency fund, but the right amount depends on how you earn and what you spend.

A salaried employee with predictable monthly earnings faces a different set of risks from an entrepreneur, or someone whose remuneration fluctuates significantly.

Behrendt suggests making the exercise more personal. Imagine your income stopped tomorrow. Which expenses would continue? Which could you cut or pause? And could new costs arise at the same time?

“For most people, trying to have at least six months’ worth of funding in place is appropriate. But for some people it could be a little bit more,” he says.

There is also the question of where to keep it. Immediate access matters, so some emergency money may belong in cash. But if the fund is substantial and remains untouched for years, holding all of it in a savings account may not be the most effective approach.

Why shouldn't school fees and emergencies share the same pot?

Spending your emergency fund on something you knew was coming, leaves you without a buffer when something you didn't expect arrives.

The confusion is understandable. Money being accumulated for next year's school fees and money held for an emergency might sit in similar short-term investments, but they have entirely different jobs.

“The last thing that you would want is for one of our clients to use their emergency savings to deal with a planned expense that hasn't been appropriately catered for, only to face an unexpected event without that safety net,” says Behrendt. 

Giving each pool of money a clear purpose makes it easier to see whether your financial foundation really is secure.

What happens to my investment plan if my income stops?

Your income pays today's expenses. While you're accumulating wealth, it is also what funds tomorrow. That makes the ability to earn an income an asset in its own right.

Sinenhlanhla Sithomo, Head of Insurance and Investments at Investec Life, points out that an illness or injury can have two financial consequences. There is an immediate loss of earnings, but there may also be an interruption to retirement and discretionary investment contributions.

“You don't want that loss of income to be impacting your ability to continue investing and to continue to save,” he says. 

Emergency savings can absorb some interruptions, but income protection is designed to replace your earnings when illness, injury or disability prevents you from working, subject to the terms of the policy.

For entrepreneurs and professionals whose businesses rely heavily on their ability to generate revenue, the calculation may extend beyond personal income to expenses from the business.

Aren't medical aid and gap cover enough?

Medical aid helps fund qualifying healthcare costs, while gap cover addresses certain shortfalls. But a major illness or serious accident can create expenses well beyond medical bills.

Sithomo distinguishes this from income protection. Income protection replaces a portion of your regular monthly earnings if you cannot work due to any illness, injury, or disability.

It's designed to protect ongoing earnings, and is often seen as the foundational safety net because your ability to earn funds everything.

Then there is severe illness cover. Severe illness cover is intended to provide a once off lump sum that can help meet new costs associated with qualifying serious illnesses, like cancer, a heart attack, or stroke. 

Those costs might include extended recovery, rehabilitation, changes to a home or access to treatments that aren’t fully funded through existing healthcare arrangements.

Protecting your wealth is part of building it

Long-term investing depends heavily on being able to leave the money invested and, ideally, continuing to contribute to it. An unexpected event can interrupt both.

That is why emergency savings and appropriate protection belong in the same conversation as investments. Their job is not to generate long-term wealth. Their job is to give that wealth a better chance of remaining intact.

Sithomo describes the benefit simply: “My investments will be intact even if something happens to me.”

A financial plan cannot prevent the unexpected. A stronger foundation can make it less likely that one difficult year undoes years of careful investing.