Financial resilience is defined as the ability to withstand life events that impact one’s income and/or assets. Think about what would happen to your household’s financial stability if there was a job loss, debilitating illness, injury or a major home or automobile expense. Would you be up to the challenge?
According to a Pew Charitable Trust study, it appears American families are becoming more financially resilient. Based on data from 2014 and 2015, some of the study’s findings showed:
- Households experiencing financial shocks in 2015 found it difficult to make ends meet. However, overall they reported less trouble meeting regular obligations than in 2014.
- This 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 appears to be on the upswing, households are still having problems meeting their financial obligations after a financial shock. Is there an answer to this problem? There could be a few…
6 Ways to Help Increase Your Financial Resilience
Knowing where your money is going is the first step to having enough of it when a financial shock hits. Once you properly measure and manage your monthly financial transactions, you’ll be able to build a spending and savings plan.
If you’re not expecting a big 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 biggest monthly costs and determine if there’s a way to decrease them.
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.
Make more money.
Easier said than done, we know, but it’s very 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!
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, household supplies, etc. 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). No matter what amount you can scrape together, place it in your Emergency Fund.
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.
To see how others have dealt with financial hardship and share your story on the Rebuilding Your Credit board on myFICO forums.