Step 3 – Protection

  • Financial education
  • 4 minute read

Feel-good financial wellness: how to stay protected, whatever the weather

After the hottest summer since 1976, it might seem downbeat to talk about rainy-day funds. In the not so distant past, ‘Protection’ was more likely to mean sunscreen and barbeque tongs than umbrellas and waterproof coats.

But whatever the weather, having money put aside to cover a change in financial circumstances is an essential part of financial wellness. It gives employees peace of mind knowing that they can cope with the unexpected, if and when it happens. And employers will feel the benefit from staff who worry less about their finances at work.

A general rule of thumb for employees is to have a safety net of between three and six months’ worth of salary in reserve – sufficient to cover a sudden job loss, a period of illness or caring commitments in the short to medium term.

However, encouraging employees to build up a safety net of this magnitude might sound like a tough sell. Individuals are already paying into a pension through auto-enrolment and day-to-day finances are tight. Plus, saving for a potentially unpleasant event that might never happen won’t sound anywhere near as tempting as putting money aside for a holiday or new car.

Like most aspects of financial wellness, to achieve the best results employees and employers need to work together to create a safety net.  Here are a few tips for employees and employers to help: 

Employees

Make it a habit

As we’ve seen in the previous articles in this series, financial wellness is about building good habits. Creating a financial safety net is no different. Setting up a direct debit to save each month into a fund that can’t be accessed too easily can make protection the norm, not the exception. 

Build confidence

Money put aside each month quickly accumulates into a meaningful sum. As soon as savings start to build up, it’s easier to see the value of them, get enthused and keep going. However, according to Close Brothers’ 2017 Lifetime Savings Challenge research, almost a third of employees save less than £50 a month, and 20% save nothing at all. Simply saving something each month – no matter how small – is a crucial step in becoming confident about saving. 

Get a ‘saving not borrowing’ mindset

It’s tempting to fall into a ‘if something bad happens, I’ll borrow money to cover it’ mindset.  In some rare instances, borrowing might be the only option.  But it will never be the most cost-effective approach because borrowing will always involve paying out interest. In contrast, money kept a savings account will grow when it’s not needed – and do its job of giving protection when it is. 

Employers

Make pay go further

Offering appropriate benefits can help employees’ pay go further. That could mean using salary exchange for pension contributions, support with affordable loans, or other benefits such as discount shopping schemes or season ticket loans.  All of these can help free up money for employees to save regularly.

Offer protection benefits

Providing access to benefits such as income protection, medical or critical illness cover can help to tick off some of the items on employees’ worry lists.  

Be inclusive

Even high fliers need a safety net. The rule-of-thumb of having between three and six months’ savings in hand applies just as much to high earners as it does to those on lower salaries.  Reaching high earners may require a different approach to communications, but it’s just as important as supporting those on lower salaries.  

Educate employees

Close Brothers’ Lifetime Savings Challenge 2017 showed that only 40% of employees are confident about choosing the right financial product for their savings needs. Financial education will not only help employees understand why they need to protect themselves, but make sure they save that money in the right way and in the right place.
Protection is step three in Close Brothers’ Seven Steps to Financial Wellness series. In our next article, we’ll explore step four, Property.  

If you would like to know more about financial education in the workplace please email financialeducation@closebrothers.com

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