While no one can eliminate money stressors, there are affordable ways to reduce them, protect your finances, and boost your peace of mind.
Building financial resilience can be the difference between surviving or sinking under stress. Laura reviews strategies for being prepared for unexpected situations, especially in an uncertain economy.
Money Girl is hosted by Laura Adams. A transcript is available at Simplecast.
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The COVID-19 pandemic significantly impacted the global economy and caused substantial financial blows for many. In the United States, the unemployment rate skyrocketed to 14.7% in April 2020, the highest level since the Great Depression. By June 2021, it fell under 6%, but fewer people are employed today than before the pandemic.
In addition to massive job losses and business closures during the pandemic, wages haven't kept pace with inflation, and consumer debt has skyrocketed. While the full impact of the financial crisis is unknown, staying safe from future financial setbacks depends on becoming financially resilient, which I'll discuss in today's show.
Thanks for joining me this week! My name is Laura Adams, and I'm a personal finance expert who's been hosting the Money Girl Podcast since 2008. I'm also the author of several books, including my most recent title, a No. 1 Amazon New Release, Money-Smart Solopreneur–A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers. If you're building a business or want to earn more income, I hope you'll grab a copy of the paperback, ebook, or audiobook!
My mission is to give you the knowledge and motivation to prioritize your finances, build wealth, and have more security and less stress. Be sure to subscribe to the show and submit your money questions or comments by calling 302-364-0308 or emailing me using my contact page at LauraDAdams.com.
What is financial resilience?
Being financially resilient means you can survive shocks or stresses, like a pandemic, recession, or personal turmoil, without experiencing significant financial hardship. In other words, you're prepared for unexpected situations, like getting laid off, having an accident or illness, or suddenly needing to make a big purchase.
Building financial resilience means you've thought about potential risks and have plans to solve them as much as possible. While no one can eliminate money stressors, there are affordable ways to reduce them, protect your finances, and boost your peace of mind.
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As your life and economic landscapes change, it's essential to reevaluate your financial strengths and weaknesses. I'll review seven secrets to building financial resilience in a post-pandemic economy to help you better prepare for future challenges.
1. Look at your financial "big picture."
If you're a regular Money Girl listener, you've heard me talk about creating a personal financial statement or PFS using paper, a Word doc, or a spreadsheet. It's one of the best ways to keep tabs on your financial well-being by seeing your strengths and weaknesses.
Your PFS is a powerful document because it includes details about your assets and liabilities and calculates your net worth. It's also a great place to put any important information, like names of your financial or tax advisors, locations or links to emergency documents, insurance policy names and numbers, and account logins.
Assets are items of value you own, such as investments, real estate, cars, jewelry, household furnishings, sporting goods, cash, and retirement accounts. It's essential to list your significant assets–even if you still owe money for them, such as a mortgage or car loan–and try to assign accurate market values.
You can lump lower-priced items together under categories, such as furnishings; however, be as precise as possible for high-value things like real estate and cars. Once you list your assets, add up the total.
Below your assets, list your liabilities or what you owe, such as mortgages, car loans, student loans, personal loans, credit cards, and balances on credit lines. For each debt, include your creditor's name, outstanding balance, annual percentage rate (APR), and status, such as having a fixed or variable rate. Then add up your total debts.
When you subtract your total liabilities from your total assets, the resulting number (positive or negative) is your net worth, a vital indicator of your financial health. Gathering your financial information and creating a PFS takes time, but it's worth it!
When your net worth rises over time, you're becoming more financially resilient! However, there are more markers to watch, which we'll cover next.
2. Understand your cash flow.
After looking at the big picture of your finances by creating or updating your PFS, the next secret to financial resiliency is getting more familiar with your cash flow. Whether or not you have or create a budget, knowing your income, expense categories–such as housing, food, insurance, and transportation–and financial goals is vital. Ideally, you should document them in a spending plan.
Like your PFS, you can create a spending plan on paper or a computer spreadsheet, but there are some terrific financial apps, like Mint and Quicken, to try. Once connected to your financial accounts, they automatically import transactions and help you set a budget, monitor your progress, and make adjustments to stay on track.
The more familiar you are with your expenses, the more likely you are to reduce or eliminate unnecessary ones keeping you from financial resiliency. You may be surprised by how much you spend on goods and services you can live without.
For instance, do you really need an expensive gym membership or so many streaming services and subscription boxes? Instead of buying brand-new items, could you shop thrift stores for pre-owned clothing, furniture, and household items? If you're living beyond your means or spending mindlessly, reining in expenses can be your path to freeing up money for better uses.
There are many budgeting techniques, but a simple strategy is the 50/30/20 method. It recommends spending no more than 50% of your net (after-tax) income on essential expenses, such as housing, food, healthcare, insurance, and transportation. You limit discretionary expenditures, such as dining out and entertainment, to 30% of your income. And you spend the remaining 20% on savings, such as 10% for an emergency fund and 10% for retirement.
3. Shore up your emergency fund.
And speaking of emergency savings, having cash in the bank is essential to financial resilience. Finder.com's Consumer Confidence Index found that 17% of Americans say they could only live off savings for a week or less if they lost their job tomorrow. If that's your situation, it's time to allocate more of your budget to building a healthy cash reserve, which you can't be financially resilient without!
While everyone should have a cash cushion, it's even more critical in our post-pandemic economy, where inflation and higher interest rates seriously threaten many people's financial well-being.
A good rule of thumb is to keep at least three to six months' living expenses in an FDIC-insured high-yield savings account. Or you might base a target emergency fund on a percentage of your gross income, such as 10%. For instance, if you earn $80,000, keeping at least $8,000 safe in an FDIC-insured high-yield savings account is wise.
Remember that having enough money at your fingertips for emergencies isn't a luxury–it's a key component of being financially resilient, eliminating potential money stress, and having a secure future.
4. Keep debt as low as possible.
In addition to building emergency savings, maintaining low debt levels is critical for financial resilience. Having fewer liabilities removes the pressure if your pay gets cut or you lose your job or business income during an economic downturn. It can also be the key to living within your means if you tend to overspend.
As you create and regularly update your PFS, sort your debts from highest to lowest interest rate. In general, you should first eliminate debts with high rates, such as credit cards or accounts with variable rates that charge more when rates rise, as we've seen in the past couple of years.
It's wise to pay off your low-rate debts–which typically come with tax breaks, such as mortgages and student loans–dead last. Don't prioritize paying off low-rate, inexpensive debt ahead of schedule over building your cash reserve or eliminating high-rate, expensive debt.
In the recent debt ceiling deal negotiated by Congress, the pause on federal student loan repayments expires at the end of August. You should receive a statement at least 21 days before your first payment is due. If you anticipate it will be difficult to pay, contact your loan servicer now to discuss your eligibility for reduced payments or loan forbearance based on your income.
If you need help creating a debt payoff plan, I created the detailed course, Get Out of Debt Fast--A Proven Plan to Stay Debt-Free Forever. It teaches multiple strategies to reduce and eliminate any debt you owe, such as credit cards, mortgages, and student loans. You can find a link in the show notes!
5. Maintain good credit scores.
Building and maintaining excellent credit scores is another secret to a healthy financial life. Not only are they a significant factor in how much you pay to borrow money, but they also improve financial resiliency by cutting the cost of certain products and services, such as auto, homeowners, and renters insurance.
Plus, excellent scores make you eligible for premium offers and improve your chances of renting a property or getting a job with an employer that checks credit.
RELATED: 7 Credit Mistakes That Could Cost You
6. Purchase the right insurance.
An often-overlooked aspect of being financially resilient is having the right insurance to stay safe from risks and protect your finances. Consider if you have enough coverage for the following types of policies.
When you create or update your PFS, it's an excellent opportunity to list the coverage you have or don't have for yourself (such as life and disability) and any high-dollar assets, such as real estate, vehicles, jewelry, and collectibles. Include each policy insurer's name, number, and amount of coverage. Remember that your insurance protections should increase as your income and net worth increase.
7. Keep investing.
Once you have emergency savings and insurance protection, you build financial resilience by regularly investing for your future—regardless of age. If possible, I recommend maxing out tax-advantaged retirement accounts at work first.
The next best place to invest is an individual retirement account or IRA you open independently, such as a traditional IRA or a Roth IRA (if you don't exceed the annual income limit). Retirement accounts are surefire ways to build wealth, cut taxes, and create future financial security.
When inflation rises, or the economy struggles, many people stop investing because they think they can't afford it. While it's easy to let talk of a recession or market volatility alarm you, never cash out existing accounts or pause investing. When market prices go down, that's the exact time you should be sure to invest.
The best investors stay calm by dollar-cost-averaging, investing a set amount each month or week in a diversified portfolio, whether fund prices are increasing or decreasing. Young investors benefit from choosing mostly stock or growth funds, and those closer to retirement should limit risk by shifting a growing portion of their portfolios to income funds and cash.
Remember that taking money out of a retirement account before the official retirement age of 59½ typically comes with a 10% early withdrawal penalty. Plus, you owe income tax on withdrawn amounts that weren't previously taxed. So, only put money in a retirement account that you won't need to spend any time soon.
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How to increase your income for financial resilience
In addition to these seven resilience strategies, diversify or increase your income for more financial stability when possible. For instance, you might start a part-time business on the side of your day job or become so indispensable at work you're unlikely to get laid off in an economic downturn.
Also, you might seek out new or in-demand skills and education to start a new career by:
Building financial resilience involves reducing potential risk, increasing your options, and improving your ability to bounce back from life's challenges.
That's all for now. I'll talk to you next week. Until then, here's to living a richer life!