Your financial resilience is your ability to withstand life events that impact your income or assets. These life events could be the loss of a job, health problems, a divorce, your car breaking down, etc.
With a huge portion of the U.S. population facing unemployment and loss of income due to COVID-19, many folks’ financial resilience is being put to the test.
Financial resiliency is what allows you to “roll with the punches” and keeps an unexpected expense or job loss from being an immediate emergency. Life events that test your financial security usually suck, but by increasing your financial resilience, you’re able to manage life’s curveballs with a little less stress.
In light of current events I wanted to share a few ways to improve your financial resiliency, since it’s not just about the money you have in the bank.
Build an Emergency Fund
Okay, so I know I said it’s not all about the money you have in the bank, and I stand by that! But, having a solid foundation of savings provides you a pretty good baseline of financial resilience.
With the recommended 3 months of living expenses saved, you’re able to cover most of life’s unexpected expenses and you’ll have some breathing room in case of a job loss. You want to make sure your emergency fund is liquid and accessible — high-interest savings accounts are great for this.
Okay now on to the other tips!
Maintain a Flexible or Low Cost of Living
By keeping your cost of living on the lower end, you’re creating more buffer between your income and your regular expenses. This buffer lets you build up the savings mentioned above and also means you need less money to cover your essentials in the event of lost income.
When I say “flexible cost of living” I mean focusing on keeping your monthly bills low. Even if you typically spend your discretionary money on eating out and travel, those are areas you can quickly cut back in in the case of a job loss or needing to cover a major expense. It’s not as easy to cut back on your rent and car payment in a pinch.
Keep a Low Debt-to-Income Ratio
To figure out your debt-to-income ratio, you add up all of your monthly debt payments and divide it by your monthly income. This tells you what percentage of your monthly income is already accounted for by debt payments.
Keeping your debt-to-income ratio low complements the idea of keeping your overall cost of living low. If you have a lot of debt, then you probably have a lot of monthly payments that need to be paid. If you have hundreds of dollars’ worth of minimum payments on credit cards and various loans, it will be hard to cut back expenses when needed.
Purchase the Right Insurance for Your Situation
Life insurance, homeowners’ and renters’ insurance, auto insurance, unemployment insurance, disability insurance — they all provide you with a certain level of financial resilience. You want to make sure you have the appropriate amount of coverage for your situation and that you’re not overpaying.
In some situations, you may opt to self-insure. For example, if you have 6 months of living expenses saved and have a good amount of assets, it may not make sense to pay for private unemployment insurance.
If you commute a long distance to work, you may want a higher level of coverage on your auto insurance and a disability insurance policy as a way of mitigating the financial risk of a car accident.
Ultimately, your insurance needs will depend on your situation, your liabilities, and your current financial resilience.
Have Multiple Sources of Income
Another way to improve your financial resilience is by diversifying your sources of income. A lot of people have a side hustle they work or have ways of earning extra money outside of their 9-to-5 job. Even if it’s just an extra $200 a month, that’s going to improve your financial resiliency because you don’t have all of your monetary eggs in one basket.
Cassie and I have a pretty wide variety of income sources, which helped Cassie make the decision to leave her full-time office job last year. You might not turn your side income into a full-time job, but you might use it to fund your emergency fund or to get closer to paying off credit card debt.
Know and Value Your Skills
Related to having multiple sources of income is knowing what skills you have and understanding their value to others. You probably have one or more skills or hobbies that you could monetize if you needed to in a pinch.
This might look like photography, resume writing and editing, baking, web design, being good with kids, writing, tutoring, etc. Make a list of everything you’re good at and enjoy!
Maybe you offer 30-minute gardening consults to help your friends stop killing all of their plants. Maybe your sourdough starter is thriving and you sell a few excess loaves each week. Having a few skills that you understand could be monetized if needed can help prepare you for that unexpected loss of income. Plus, it’s nice and validating when someone wants to pay you for that loaf of bread you’ve been perfecting!
Connect with Your Network and Community
Having a varied and close community is also super important to your financial resilience. We all need a little help sometimes, and having someone in your corner who you can lean on when things get rough is important — whether it’s borrowing some money or a car, or crashing on their couch.
Your network is also important because most folks get their jobs through people they know. Your connections will likely lead to your next job if you find yourself suddenly unemployed, and if you’re starting out a new side hustle (yes, even just to get rid of all of those excess sourdough loaves), your connections will likely be your first customers as well.
Reaching out to your network can feel uncomfortable, but most people are going to be more than happy to make a connection or help you out in some way.
Vote to Strengthen Social Welfare Programs
And finally, the social safety net that exists where you live will dramatically affect your financial resilience. The social welfare system in your community, state, and/or country will significantly impact your financial resilience by providing you with a liveable amount of money if you lose your job, ensuring that your food needs are met, and making sure you’re never without access to health care.
There are families in the U.S. who may seem to be doing pretty good, but a badly timed health issue could quickly leave them bankrupt (if Cassie had needed to get her appendix out three days later, she wouldn’t have had insurance, and we would have been on the hook for more than $50,000).
Badly timed health issues don’t threaten people’s financial wellness in many other countries, like our northerly neighbors in Canada.
So, voting in support of strengthening social welfare programs is also something you can do to support your long-term financial resilience — as well as that of your community.
Financial resilience isn’t just one thing. There are tons of small and large shifts you can make to help improve you and your circle’s financial resilience. Financial security is vital to your mental health and incredibly important in supporting a society that doesn’t make reactionary decisions out of fear.