Cashflow - Facing up to the consequence of illness

Scott Hansell
Financial Planning

In part one, we looked at the concept of personal cashflow planning, and how it can help people map out their financial futures In this part, we look at what happens when an unforeseen event disrupts the plan.

One of the most common occurrences which affect self-employed people is the inability to work through accident or illness.  So let’s see what happens if we build such a scenario for Joe.

Figure 1: Ill Health Protection scenario

Let’s take the scenario of Joe having an accident at age 26 which means he is unable to work for a year.  As we can see from the top chart in Figure One (taken from the Cashflow Planning Tool), As well as having to raid his savings in order to meet his living expenses (effectively wiping out the deposit for his house), Joe would still be left with a shortfall, which he would have to fund out of other savings or by borrowing money. 

Not only would this cause him short-term financial pain, but it would have a knock-on effect for some years, compromising his ability to get on the property ladder, and potentially even his ability to make adequate pension contributions for a few years (something which at this early stage in life would have a disproportionate effect due to compounding). 

The bottom chart shows graphically how income protection against ill health immediately plugs that gap, enabling Joe to concentrate on his recovery without worrying about short-term financial issues, as well as protecting that longer-term goal of buying his own property, and a comfortable retirement. 

Of course, so far, Joe’s planning has been for just himself, but the situation completely changes when marriage and starting a family come into the equation.  In the next part, we meet Joe’s wife Jessie and his son Johnnie, and see how their arrival in his life affect his plans.

Read the next part in the series here.

Do you want to know more about how the cashflow tool could help you?

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