2020 has been a year of great uncertainty. Of course Covid-19 has dominated the landscape, bringing with it insecurity for some people around both their health and also their economic circumstances. As countries are moving in and out of various states of lockdown, for many people this is creating a lot of worry about their jobs. For some this is temporary and they can see a relatively swift return to normality. For others their prospects are more bleak, as they are forced to close their business or they see their employers reducing headcount or shutting down altogether.

Now is a really appropriate time to stress test your finances in light of the economic challenges that Ireland is currently facing.

If you have a mortgage, your bank will have carried this out when lending you the money – after all, their primary goal is to get their money back! They would have sought clarity in your ability to repay the loan. However they also have security over your home, so if all else fails they still have plenty of leverage to up the pressure on you…

Stress testing of your finances should not just be a once-off exercise carried out by a bank – it makes sense for you to periodically examine your capability to withstand a sudden financial shock.

The place to start is to consider the risks to your finances and the likelihood of them coming under pressure. These can probably be summarised in the three main areas below. For each of them, there is a range of strategies to consider in order to bolster your finances.

Your income security

This can of course be susceptible to a range of shocks, as we are seeing today. Economies can suddenly and swiftly plummet due to a range of factors (a pandemic only being one of them), and as a result companies can end up shutting down. Closer to home, your own business or the company you work for may struggle as a result of changing market dynamics, increased competition or simply poor performance. What’s the likely threat to your income?

To protect against a potential loss of income, you can always look for ways to advance your career and indeed create multiple sources of income. In addition to this, build up an emergency fund that will cover at least 6 months of expenses in case your income disappeared. Failing this, is there another source of cash that you can tap into if needed, such as a benevolent family member?

Retirees should consider their ability to withstand sharp falls in their investments. Should this happen, would you then be forced to sell assets in a depressed market? Talk to us about avoiding this scenario. 

Your spending

Live within your means, and this includes keeping money aside for emergencies. One of the biggest mistakes people make is to live on the very limits of their finances. If something goes wrong then, they are immediately in trouble.

Have a household budget and stick to it. This should include your day-to-day spending and big purchases – holidays, changing the car and home improvements. Wherever possible, these should be funded by savings as opposed to borrowings. Don’t take on debt that might appear well within your means, but will become unsustainable if interest rates rise or you suffer a shock to your income. If you are not paying off your credit card in full each month, it’s time to take action – this is a major alarm bell…

Your health

Your physical and mental health are really important drivers of your financial security too. After all, without these your ability to earn income may be compromised and your expenses may also increase as a result of care costs etc.

The starting point is to live well and stay healthy. Having a good diet, exercising regularly and looking after your mental health are each very important factors in helping you to live a more rewarding life and in building your resilience to deal with the slings and arrows of life and any financial shocks.

However sometimes unfortunately ill-health just visits your door. How will you deal with this? Are generous sick-pay benefits available to you, or do you have sufficient income protection and specified illness cover to deal with these scenarios?

In stress testing your finances, consider all of these areas in turn. Are their specific actions that you can start to take today that will strengthen your ability to deal with an unexpected financial shock? If there is, now is the time to take action and to build your confidence and capability to deal with any unexpected events in the future.

Ethical investing refers to the practice of using one's ethical principles as the primary filter for the selection of investment assets. Today it is seen as one element of the broader investing approach of Socially Responsible Investing (SRI). With the increased attention given to climate change, achieving a just society and the desire for good health, particularly in the current Covid era, there has been a surge in interest in SRI. Investors want to understand the impact of their money, and they want it to enhance the world we live in as opposed to simply achieving monetary growth at any cost.

In this piece we’re going to describe a number of the different types of SRI, and then we’re going to consider one of the main challenges that is often raised in relation to SRI.

First of all, there are a number of different types or styles of Socially Responsible Investing. The three most common ones are,

• Sustainable Investing
• Social Investing
• Ethical Investing

Sustainable Investing

This branch of investing is based around including companies that have a positive impact on the world in which we live and specifically the environment, while excluding companies that have a negative impact. We see these funds investing in the likes of renewable energy and responsible waste management companies, while excluding companies that have high carbon emissions or who produce ozone depleting or agricultural chemicals.

Social Investing

This type of investing is based around including investments in companies that have a positive impact on society, while excluding those who are seen to damage society. Funds that invest on a social investing basis will exclude companies that derive their income from or produce the likes of alcohol, tobacco, pornography or gambling.

Ethical Investing

While ethical investing will also be sympathetic to the above styles of Socially Responsible Investing, it will consider other factors too. This might entail excluding companies that use child labour, have poor working conditions or pay below minimum levels. Ethical funds may also exclude investing in a country as a whole – the best example being the avoidance in investing in South African companies during the Apartheid regime.

Turning our attention now to an argument that is sometimes levelled at Socially Responsible Investing, and that is a concern that investing in line with your principles costs you money in terms of a lower return from your investments. This argument is relatively easily refuted on a few counts.

First of all, as with all investments, there are underlying investment principles that must continue to be followed. These are first of all that investing in stock markets is only appropriate over the medium / long term without taking on significant risk. This equally applies to SRI investing. Also a diversified portfolio of assets is really important. A basket of SRI stocks will likely have similar performance characteristics to any basket of stocks, in that some will outperform, and some will underperform. We would never recommend investing in a single “dead cert” individual company, irrespective of whether it is socially responsible or not. Diversification reduces your risk. So don’t forget basic investment principles.

In fact there is a school of thought that says that companies that are really well run in terms of SRI principles also tend to be well run overall. As a result, they are more likely to tend towards outperformance.

Ethical investing or Socially Responsible Investing is more mainstream now. It allows investors the comfort of investing their money, while not compromising their own values. And it typically doesn’t cost in terms of returns.