Financial Resilience: What Is It and Do You Have It?
Originally published on November 9, 2017, updated on June 22, 2020.
Financial resilience is defined as the ability to withstand life events that impact one's income or assets. During these times, it is more important than ever to know how to deal with and endure income changes.
Do you know if you're up to the challenge? Although the latest Pew Charitable Trust study regarding financial resilience is from 2017, the findings are just as important today. Some of these findings include:
- Financial resiliency improvement was "especially evident among Hispanic, black, and millennial households."
- A family with savings in 2014 reduced its risk in 2015 of struggling to make ends meet after its most expensive shocks—although many with sufficient resources still faced financial hardships.
- Regardless of income, half of the survey respondents who had adequate resources to cover the cost of a typical family's most expensive shock ($2,000) still experienced financial difficulty after a shock. Even among households that had $4,000 available, 43 percent struggled after their most expensive shock.
Although financial resilience appeared to be on the upswing in 2017, the problem of meeting financial obligations after the financial effects of COVID-19 is something most people haven't experienced. Are there ways to help ourselves meet these obligations as we work our way through these times? There could be a few.
6 Ways to Help Increase Your Financial Resilience
1. Track Spending.
Know where your money is going. It's the first step to having enough of it when a financial problem hits. If the financial shock has already hit, monitor your spending carefully by measuring and managing your monthly financial transactions. This will help you build a spending and savings plan.
2. Cut Costs.
If you're facing potential unemployment or not expecting a raise or influx of money, the next best way to help yourself get prepared for an unanticipated financial hit is to cut costs. Identify your highest monthly costs and determine if there's a way to decrease them.
3. Eliminate Debt.
If you have a high debt-to-income ratio, any type of financial crisis can quickly make things more difficult. Start with your credit card debt (the one with the highest interest rate) and work your way toward eliminating the rest. During this pandemic, many creditors are working with consumers to help ease the burden of paying debt. Check with your credit card company and any other lender to see how they might help you.
4. Make more money.
Easier said than done, we know, but it's possible. Creating multiple streams of income can include anything from handling retail customer service calls from home (part-time) to becoming an online advertising associate to writing blogs or publishing a book. Think about what special talents you have and find a way to turn them into a money-making machine!
5. Create an Emergency Fund.
Although intended for "emergencies," this fund should cover six months' worth of expenses, including housing, food, healthcare, auto and miscellaneous items like clothing, toiletries, or household supplies. There are different ways to build the fund, such as: depositing a specific amount of your paycheck - no matter what and cutting back on expenses (see #2 above). Whatever amount you can scrape together, place it in your emergency fund.
6. Foster Your Relationships.
Getting through life alone is difficult, if not impossible. Having a network of people on which you can depend is extraordinarily important during times of hardship. Not only can others help you out financially, but they can also offer emotional support, advice, and alternative paths when it appears that there are no roads left to take.
The sooner you start following these six steps, the sooner you can start having some peace of mind knowing that if a financial hardship hits your household, you can be as financially resilient as possible.
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