The word resiliency is defined as “the capacity to recover quickly from difficulties, toughness.” This is often used relating to physical wellness and stamina and the ability to recover from an illness. Financial resiliency is the ability to recover from an unexpected financial burden, like a medical bill or car repair that you didn’t see coming.
On a more substantial level, having financial resiliency allows you to better weather the storm of an economic downturn or recession, and the job losses that sometimes accompany those.
The best way to achieve financial resiliency is to develop consistent habits so that you spend less money than you earn over a long period, ideally throughout your whole career. The habit of saving your money allows you to build up a nest egg and pay down debt, both of which will help you in difficult financial times.
What are the Core Components of Financial Resiliency?
- Budgeting – spending less than you make regularly
- Building a cash cushion ($500)
- Paying off high-interest debt
- Having an Emergency Reserve (at least 3 months of monthly expenses covered)
- Having a savings account
- Ensuring you’re properly insured
- Building a retirement fund
- Investing
Budgeting might not sound glamorous, but creating a budget is an essential part of creating financial resiliency. If you are earning less money than your monthly expenses and you wish to change from taking on mounting debt to finance your lifestyle, to taking control, then you have a few options.
Option 1: Increase your Income
One possibility is that you can choose to find new or additional income streams. Sometimes you can change jobs or careers to find something that pays more. Although this is an option, this can be stressful and disruptive to your life. An easier option would be to earn more by taking on extra work, usually with a part-time job. Typically, this will be something outside of your regular career, maybe something you did in college for extra income. For example, bartending, waiting tables, or tutoring could be excellent for extra income. Not only does this give you extra money, but you are spending spare time earning that might have been spent on dining out and other expensive extracurricular activities.
Option 2: Decrease your Expenses
If taking on extra work doesn’t sound appealing or isn’t an option, then cutting back on expenses is the better route. For most people, many small habits can save you substantial amounts. Getting rid of extras or finding cheaper alternatives, such as making coffee at home and not dining out, are common examples. A great way to cut expenses is first to set up a budget.
Cash Cushion
Financially resilient people will have an emergency fund that can be used for these unexpected financial “hits” to the pocketbook. Starting with just $500 will make a huge difference if an unexpected financial situation were to arise. After that, you should aim to have 3-6 months or more of your monthly income in an emergency fund.
Paying Down Debt
Reducing debt also contributes to resiliency. When you pay down and then ultimately eliminate a debt, your monthly expenditures decrease, allowing you to redistribute those extra funds to savings, increasing resiliency. Paying down high-interest debt, usually credit cards is the best place to start.
Reviewing your Insurance Policies
Setting up a time to meet with an insurance agent sounds like one of the least appealing things to do. However, to achieve financial resiliency it’s essential to make sure you are properly insured in all aspects: health, life, auto, home, etc. Being adequately insured not only will give you peace of mind if an incident happens but also secures that your money isn’t taken away because of a lack of coverage during an accident or incident.
Retirement Savings & Investing
Financially resilient people are also putting money into retirement savings and investments, helping with future resiliency. Allowing a person as they get later in their careers to retire at a reasonable age, cut back to part-time, or change jobs more on their terms. When you are in a position where income is less important than satisfying work, it gives a person options, increasing resiliency.
Don’t be fooled; investing isn’t just for the wealthy. You don’t need thousands of dollars to begin investing. However, we do recommend you pay off your high-interest debt before beginning to invest any of your hard-earned money.
Financial resiliency is something anyone can achieve; step by step, you can build your path to financial resiliency. Are you ready to build financial resiliency?