Financial Resilience – Do You Have It?

One of the keys to a successful life is  resilience – this goes double for your financial resilience.

Resilience is the capacity to recover quickly from difficulties. Difficulties are a given in life. In your financial life, they can appear as unexpected drains on your resources. They may be completely unexpected, like a sudden medical problem, or they may be a surprise only from their inconvenient timing. For example, a car which you expected to last for another two years is now a pile of scrap in your driveway.

Your financial resilience is the amount of time it takes to recover from these kinds of difficulties.

Break in case of emergency

You have probably heard stories of a person lifting a car off of someone they love. How is that even possible? Our bodies are designed to respond in an emergency. Adrenaline, one of the body’s own steroids, floods the blood stream and gives us super human strength. But in our normal life, we don’t have this strength to use. Our financial lives are much the same way, except that you probably spend all of your financial strength (pay check) each time you are paid. While you may save for a special event like a vacation, when a financial emergency comes along, there is no strength (or money) left to tap; except of course your credit cards. And despite your best intentions, these cards get paid off, not in a matter of weeks or months, but over the course of years.

An Emergency Fund

A financial Emergency Fund is money set aside with the idea that emergencies are inevitable. An Emergency Fund is not touched except in emergencies, when the unexpected happens. Like that sudden medical emergency, vehicle breakdown, or ruptured hot water tank. But the fund can also be used if you suddenly lose your job. Even when the economy is performing well as it is right now, sudden job loss is a possibility. Did you know that 96% of businesses fail within their first 10 years? And even in a great job market, the right new job may be difficult to find.

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How big should my emergency fund be?

Most experts agree that an emergency fund should be large enough that you can survive for six (6) months of unemployment for a one breadwinner household, or three months for a two breadwinner household. The idea is the same, your household should be able to survive, without an increase in debt, for six months with one person being unemployed. The assumption is that you will tighten your belt in case it takes more than six months to find a new job.

Where should I keep my emergency fund?

By their nature, emergencies cause an immediate, or close to immediate need. This means that the fund should be kept liquid. In other words, somewhere it can be accessed reasonably quickly without losing much of its value. For example, you could put 2 months of it in a savings account or money market account at a local or online bank and the other 4 months in 6 1-month CDs. If you stagger the purchases, 1/6 will reach maturity each month. Stocks are not a suitable place to keep your emergency fund, since their value may be down when you need your money most.

Another idea to build financial resilience

Many people believe that a car payment is just a natural part of life. But here is an idea. When you finish paying off a car, keep making payments, but to yourself instead of the loan company. If your car payments are $350/month, you probably borrowed a bit over $15,000 (48 months at 5%). If you continue to make payments to yourself for the next 48 months, you will have about $17,000, so that you can pay cash for your next car. And by the way, continuing the same plan will let you have another $17,000 in 4 years, to use on an upgraded car. Or if you would prefer, reduce your payments to yourself by $175 and you will have $17,000 after 96 months and have an extra $175/month to spend. And if your car breaks down two years early, you will have most of the money for a new one, without touching your emergency fund.

Financial resilience is not easy for most of us. Every ad we see, and many of our neighbors and friends, encourage us to spend what we make to get all those things we think we want. But with that approach, we actually end up with less, because much of what we earn goes to pay the interest on our emergencies and impulse purchases.

Building financial resilience means a bit less now, but much more in the long run. And, quite frankly, it is also far less stressful.

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This information is intended for informational and educational purposes only and not as legal advice. If you have concerns about your credit report, harassment, identity theft, illegal collections activity, garnishments, or property liens, you should consult an attorney who specializes in consumer rights and defense.

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