We are all currently living in a strange period of time: hit with the largest pandemic of the 21st century. With the rise of COVID-19, the world is undoubtedly in an economic catastrophe; yet some are luckier than others. No, this is not about how the wealthy have fared off better than the rest, instead, it is regarding how any individual can persevere through uncertain times using one key factor. Financial resilience.
What is financial resilience?
The Office for National Statistics defines it as ‘the ability to cope financially when faced with a sudden fall in income or unavoidable rise in expenditure’. To put it simply, think about how the world is constantly changing around us, especially in light of recent events. Such occurrences can lead to unexpected changes in the economy: millions unable to work, thousands of businesses closing and entire economies crashing. These have all led to many households struggling with their finances- having to turn to unreliable credit provision that can impose huge future debt.
You can never be too sure of what to expect. What if the company you work for suddenly went bankrupt? What if there’s an accident and you don’t have the insurance to cover the costs? There’s no need to worry, because the solution is to build up financial resilience. In doing so, you improve your ability to make ends meet and are one step closer to financial freedom.
So, how do you do it?
1) Budgeting
Take control of your money. By setting out a budget for expenditures, it can help in visualizing where money is spent. This is extremely useful as it can help in deciding where budgets should be cut and where they should increase. Knowing about where your money goes can give you the confidence and security on how much to save to meet future financial goals. The first step to budgeting is to understand your payments. Some will be fixed payments taken in regular intervals, such as rent, electricity and broadband; whilst others can vary. These variable expenditures are usually on goods and services that are considered ‘wants’ and can be regarded as luxury expenses. As such payments vary from time to time, it can be an excellent place to start setting out some budgets.
2) Think Long-Term
Create financial goals on the things you want in the long-term. Sure, it is important to have short-term expenditures on experiences that keep you happy, but ultimately, there should be a set of financial objectives that your savings build-up for over time. This could be a new car, a dream holiday, a house or even to start your own business.
Having a plan should also mean planning an emergency fund. This is an amount of money set aside to be spent when faced with unexpected events. The general consensus is to have enough to keep you going for a couple of months, in which the economy recovers or you find a new job. Your financial plan should also consider retirement. You wouldn’t want to retire and be unable to spend money on luxury experiences and relax, would you? So start saving for it now and your future self will be more than grateful!
3) Avoid Risk
Avoiding risks means taking financial independence. In other words, do not be wholly reliant on other people’s assets. Instead, being able to save up and own your own house, car or even be self-employed can reduce this reliance on other individuals, and thus reduces the risk of any unexpected changes. Of course, lowering the amount of personal debt you have is no easy task. In fact, it should be a long-term process tied into your financial plan. Think about paying off any short-term loans and payments, as they can accumulate huge interest if ignored.
4) Financial Literacy
The last and arguably most important step, is to be educated. Being financially aware gives you the confidence you need with your day-to-day spending, as you can be self-assured on the monetary decisions you make. A lot of financial terms and ideas are not commonly seen in a typical school curriculum, thus it is really important to learn about these. Although it may seem like a daunting process, there are many informative and interesting resources available. Try watching the news for a couple of minutes a day, or even read an article or two- and seeing that you are reading one right now, you’ve already made a great start!
Conclusion
Hopefully this article has given you the insight needed to improve your financial resilience. Remember, it is never too late to start, and the potential reward of financial freedom, is always worth the effort; and, as Benjamin Franklin once said, “Beware of little expenses; a small leak will sink a great ship”.
Bibliography
Bennett, R. and Kottasz, R. (2000), Emergency fund-raising for disaster relief. Disaster Prevention and Management, Vol. 9 No. 5, pp. 352-360 https://doi.org/10.1108/09653560010361393 (Accessed 14/02/21)
Brownfield, G. (2019). Understanding financial resilience in a world of uncertainty. https://medium.com/stepchange/understanding-financial-resilience-in-a-world-of-uncertainty-fc09b5ce04 e9 (Accessed 12/02/21)
Lusardi, A., Hasler, A. & Yakoboski, P.J.(2020) Building up financial literacy and financial resilience. Mind Soc. https://link.springer.com/article/10.1007/s11299-020-00246-0 (Accessed 18/02/21)
Office for National Statistics. 2020. “Financial resilience of households; the extent to which financial assets can cover an income shock” (Accessed 25/02/21)
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