Are You Financially Resilient? Tips for How to Get There
6 second take: There’s a lot life can throw at you on any given day. Are your finances able to withstand the unexpected?
Financial resilience is the ability to withstand life events that impact one’s income and/or assets. In everyday language, resiliency is the ability to “roll with the punches” and carry on despite life’s setbacks. Resilient people often “use lemons to make lemonade.”
Some financially stressful events, such as unemployment, divorce, disability, and health problems affect people individually. Others, such as the COVID-19 pandemic, economic recessions, stock market downturns, and acts of terrorism, affect society as a whole.
What Makes You Financially Resilient?
Research by Sharon Danes, Ph. D., a professor at the University of Minnesota, found that there are five characteristics that enhance people’s resilience in the face of life’s changes and challenges. These five characteristics are being positive, focused, flexible, organized, and proactive:
- Positive people view challenges as opportunities. They reframe situations positively and often use the expression “It could have been a lot worse” when discussing their misfortune.
- Focused people determine where they are headed in the future and stick to their goals so that life events and other barriers do not deter them.
- Flexible people are open to experimenting with new ideas and different options when faced with uncertainty.
- Organized people set priorities and develop structured approaches to manage change and get things done.
- Proactive people work with change rather than defend against it. They anticipate and prepare for what might happen instead of responding to events after they occur.
Financial resiliency is enhanced with financial resources, such as savings, health insurance, and a good-paying job. Another resource for financial resiliency is one’s human capital. Economists define human capital as all of the knowledge, skills, experiences, and other personal qualities that people have to “sell” to potential employers.
What Behaviors Influence Financial Resiliency?
Social capital also increases financial resiliency. This includes a support system of family, friends, co-workers, neighbors, and others that can provide financial assistance, not to mention emotional support, during hard times. An example is someone driving a friend to cancer treatment, thereby saving them the cost and stress of getting to the hospital on their own.
Commonly recommended financial behaviors can increase financial resiliency. Below are five examples:
- Maintain a Low Debt-to-Income Ratio: Keep monthly consumer debt payments (all debts except a mortgage) at 15 percent or less of monthly take-home pay. A ratio of 20 percent or more is a danger zone. Example: $275 of debt payments ÷ $2,500 of net pay equals a consumer debt-to-income ratio of 11 percent (275 divided by 2,500).
- Accumulate an Adequate Emergency Fund: Save at least three months’ expenses. Keep this money liquid in cash equivalents such as a credit union, money market mutual fund, or short-term certificate of deposit.
- Learn to Earn: Never consider your education or job training finished. Continue to gain knowledge and develop new skills to increase your human capital and remain employable in today’s competitive labor market.
- Purchase Adequate Insurance: Protect dependents against the loss of a breadwinner’s income with life insurance and buy disability insurance to provide continued income following an accident or illness.
- Increase Your Financial Knowledge: Learn one new thing every day about personal finance. Good financial information sources include magazines, workplace seminars, blogs, podcasts, websites, certified financial planner professionals, adult education courses, radio and television shows, and investment clubs.