Financial resiliency must be part of your financial plan.
A successful financial plan is a lot easier to create and implement when market and personal events are working in your favor. But in life, favorable circumstances are not always the environment we encounter. This is why financial resiliency must be part of your financial plan.
Constructing a successful financial plan throughout all periods of your life requires three foundations:
Knowledge: There are the basic financial concepts one must understand and implement to achieve any success. Every road to financial success may look different, but the knowledge, or infrastructure, required to travel the road successfully is the same. Examples: savings rates, investing, debt management.
Purpose: Once you have the requisite financial knowledge you can model your financial plan towards your ultimate purpose—what you want to achieve with your financial life. Unlike the knowledge, this is deeply personal and dependent on the kind of life you want to lead and your subjective financial priorities. Examples: retiring early, buying rental property versus investing in the market, paying for a child’s education, etc.
Resiliency: Mastering knowledge and defining your purpose are not guarantees you will achieve your goals, so it’s important to also have a pillar of resilience—this prepares you to continue moving forward even when your purpose is challenged or changes as it will throughout your life.
Much of my content focuses on the first pillar—financial education, but today, I’m going to focus on financial resilience. Over the last few months, conversations with clients and colleagues have focused on their worries about the current economic environment. Their concerns are wide-ranging—things like inflation, housing costs, government fiscal policy, but at their heart, they want to make sure their financial plan is not uprooted by outside forces they cannot control.
Whether you feel economic strain now or not, at some point you will need to contend with poor market conditions or life events. It is vital you understand how to do this effectively. If resiliency has not been a facet of your financial plan, I recommend immediately making it a priority.
Here are some ways to start immediately developing your financial resiliency:
Reduce Your Expenses & Increase Your Savings
If you are already in a financial crunch because of a lost job, inflation, or other difficulty, you may only be able to decrease your expenses. But if your finances are in good health, now is the ideal time to think about where you could make reductions and begin saving more. Here are some very common places households can reduce their spending immediately:
home maintenance (gardeners, house cleaners)
subscriptions (Netflix, HBO, etc.)
food (dining out, delivery/takeout, food subscription services)
entertainment (bars, concerts, sports games, etc.)
gym memberships (yes, you can stay in shape without one, especially a very expensive one)
travel
Budgeting and aggressive savings is a foundation of prosperity and helps build long-term financial resiliency by reallocating cashflow to:
Building a robust emergency fund—this helps you get through any job losses, emergencies, and other needs.
Save more towards retirement—saving more now to retirement only gives you options for the future. The more you can do now, the less you have to worry as retirement approaches.
Buying capital assets—ultimately you want to use your current income to purchase assets that will generate you money either now or in the future. Capital assets include an investment portfolio, real estate, businesses, etc.
Increase Your Income & Save More
I’m no proponent of “side-hustle” culture, but I am a huge proponent of diversifying your income streams and growing your skills. Oftentimes, a side-hustle will help both. If you want to increase your income through additional work and efforts ask things like:
What are you already an expert in? Could you offer consulting services related to this expertise in addition to your current employment?
Could you make an online course or teach people about something you are already good at?
Do you enjoy creating things that could be sold for profit? Or do you have items that could listed for sale online, requiring little effort beyond the initial posting?
I have several clients who have turned a side-hustle into their living. That is certainly not for everyone. But for now, think seriously about how you could potentially make more income solely for the purpose of investing it into another financial asset that will improve your financial resilience.
I read once that the average multi-millionaire has seven streams of income. Not sure if I believe that, BUT, I do know more ways of money coming into the home makes you less reliant on one source sustaining your lifestyle.
Relocate
This might be in the same town to just a lower costing home, or it might be across the country to a lower-cost region or state. This might seem extreme or implausible. But I encourage anyone who is struggling financially to look seriously at your circumstances and decide if where you live is too expensive for your long-term financial goals.
There are a few things you need to consider:
Home ownership. Home ownership is one of the best ways to build wealth in the U.S. Sure, there are people who rent and still build wealth—they are the exception and not the rule. I encourage making it a priority to purchase a home as soon as possible. The more expensive a place you live in, the more unlikely this becomes a reality.
Savings rates. If you are living in a high-cost location and much of your cashflow is needed to simply sustain your current lifestyle, you will neglect saving for your future. Living for your current needs at the expense of a financial future means you may be forced to work for the remainder of your life, or live a lower-quality lifestyle longer-term.
Financial anxiety. This one is a lot harder to quantify, but if you’re living somewhere very costly and living hand-to-mouth, you will be constantly anxious about your financial situation. This is not good for your health, your relationships, and your finances.
I do not give this advice lightly. I’ve personally moved from a high-cost place (Coronado, CA) to a much lower costing region in the country. It made a significant difference in my wealth, cost of living, and anxiety levels. I’ve also worked with hundreds of clients making this intimidating choice—so I know it’s possible and can greatly improve your financial resilience by enabling you to buy capital assets (a home, rental property, or investments) and save more for your financial life.
Financial resilience means you are less reliant on external income sources out of your control.
You will notice in all these suggestions I’m ultimately saying—you need to be saving and investing more. This is the key—financial resilience means you are not a reliant on an immediate income stream outside of your control (such as an employer, etc.). If you can start saving more money to buy assets such as rental property or investments, you will have a lot more control over your destiny regardless of market forces.
Unlike a “healthy retirement savings rate” or other financial targets, true financial resiliency is something that takes time—sometimes a lifetime. But you need to build it in along the way, making small efforts to reduce your reliance on the bi-weekly paycheck to keep you afloat. You must hope for the best, but prepare for the worst!