Imagine if you could build a wall against all financial emergencies. Like a bubble of protection in case your income drops. Or a financial buffer of sorts for when a global economic crisis hits. Sounds good, right?
Well according to ANZ Financial Planner Scott Riddell, you kind of can - with emergency funds, a solid budget, a diverse investment strategy and insurance on assets and income.
So what is ‘Financial resilience’? It’s the ability to manage your money throughout a crisis and retain some sense of control, even when your world is spinning out. “It’s essentially the ability to absorb a shock and recover to avoid hardship and stress,” says Scott, “and it can be done by using a range of financial resources or strategies that you establish ahead of time.” It might not be widely understood, but it can be pretty powerful when it comes to planning for your future – especially if you start early!
3 ways to build financial resilience
If you’re not sure where to start, here are some quick steps towards that magical buffer.
Remember, do what is right for your circumstances, needs and objectives.
1. Hello, emergency fund
How much should you have put away for a rainy day? “Aim for six months’ worth of expenses as a minimum,” says Scott. “But this really depends on your ongoing expenses and level of debt repayments.” If your budget is stretched and large savings deposits are unlikely remember that even the smallest amounts can make a difference down the line.
2. Don’t let your debt hit the fan
Debt has its pros and its cons. On the plus side, it can give you the ability to grow your long-term wealth, such as investing in new equipment for your business or a home loan where the property value increases. These things may also have a positive impact on your quality of life.
The con is the requirement to continue meeting debt repayments, no matter the situation. “When a large proportion of a person’s income is being used to pay off debt, it’s unsustainable. One thing everyone can start doing today is paying more than the minimum on their loans. This could protect them in case of a downturn as they may be able to access those extra repayments down the track.”
3. Insure to be assured
Insurance can provide a safety net to help avoid financial hardship and stress. But we’re not just talking car or home insurance. According to our financial planner, insuring your income could be helpful too in building financial resilience. “If this is protected, an insurance provider can step in and pay up to 75% of your wages in the event you are unable to work because of injury or illness.”
So, what comes first?
From saving more, to increasing your debt repayments while you’re still ahead, it can be hard to know where to start to build your financial resilience. “The priority for each individual will depend on their existing situation,” says Scott. “If you’ve got no savings, perhaps this should be your focus. For someone who has high levels of debt, paying that down could be a good first step.” You have to do what is right for your circumstances, needs and objectives.
You can’t predict the future. But you can be better prepared for it by learning to manage your money through the good times and the bad.