Dr Natalie Schoon, Budgeting and Finance expert
Regular contributor and Islamic finance expert Dr Natalie Schoon, examines the importance of financial stability.
Previously we looked at the rather dull but necessary subjects of budgeting and saving. Even though we would all much rather think about fun things to do with money; coffees with friends and new handbags for example – the English saying ‘saving for a rainy day’ exists for a reason. This saying is about making sure you have the money to get through rough times. In this context ‘a rainy day’ is not a day when the weather is bad, or even one of those days you just feel a little off, but it’s those times when you have lost your job or you or a member of your family are seriously ill. To some extent we can rely on family for support, but we should not assume that they will always be able to do so. After all, they have obligations and responsibilities of their own to worry about. Taking your own responsibility to make sure you can survive for at least a little while in time of need will ease their worries too.
The first thing to consider are the options you have available to sustain longer periods of no income, or how you will be able to cover significant medical bills. In Europe or the United States of America, health and critical illness insurance are generally available, but they do come at a cost. When considering insurance, it is certainly worthwhile to check whether the benefits are actually worth paying for. Dental insurance in the UK, for example, is not necessarily worth it. In my case, I have worked out that if I save up the annual premium instead of paying for dental insurance, I will be covered for most, if not all, dental expenses I can incur. In combination with any excess (the maximum amount you have to pay before the insurance pays out), I am better off not insuring this particular risk. Insurance may, however, not be an option because it is not available, or the premiums are detrimental. In this case you have to consider how much money you would need to cover your expenses. This is where budgeting and saving comes in again. Knowing where we spend our money allows us to understand which expenses are essential and therefore we can assess how much money we need to put aside to survive a period of 6 to 12 months. It’s not something you need to do just on your own. One of the women’s saffron cooperatives in Herat province, Afghanistan, for example, help each other out in case of need by putting money aside. It is an informal way of insurance and works remarkably well for them and not only for times of hardship, but also to pay school fees for example. It works particularly well because the cooperative consists of women of varying ages.
Understanding your necessary spending will help you to consider how to reduce it. If you have borrowed to buy your home, for example, you could consider paying back faster while you are able to so you have a lower amount or, if you are lucky, nothing to pay for your home when times are tough. Food, gas and electricity are the next set of essential elements to consider.
One of the side effects of doing this is that it will put our mind at rest. This means you are less likely to suffer from stress even when everything is going well. Just as an example, I was recently discussing with a couple of farmers what their main reasons were for using a particular buyer for their milk. This company pays roughly 10% over the market price, but does have quality control demands. The reason why the farmers like the company is not that they pay more but the fact that they are a reliable and frequent buyer. Stability of income is, after all, more important than a one-off extra.