5 steps for building your financial resilience
What is financial resilience?
Financial resilience is defined as the ability to withstand life events that impact your income. This might be a job loss, a reduction in income or a major household or lifestyle expense.
In a new report by the debt charity, Step Change they found that people who had experienced a life event in their household in the past two years were three times more likely to be in problem debt compared to those who had not.
There is increasing concern that households do not have enough financial resilience to withstand financial pressures and emergencies without turning to bad credit. But there are steps we can all take to achieve better financial resilience. From improving the ability to make ends meet to setting and sticking to our savings goals, our 5 steps are here to help.
1. Have a financial plan
To become financially resilient you need to set goals to help you stay focused on what matters most. This also helps when preparing for things that might shake your financial resilience journey. Having a strict plan and sticking to it is probably one of the key ways to build your financial resilience. A plan is not just a resolution you make on a whim, but a well thought out and detailed blueprint for how you are going to make a difference.
To get you started you need to answer questions like:
What do I want to achieve?
Why is having a plan important to me?
Why have I made previous financial decisions?
These answers are the basis to your financial plan, once you have these answers you can then focus on getting your plan into writing and how you’re going to reach your goals.
2. Build your emergency fund
You might be saving for a holiday or for a new puppy, but are you saving for the unexpected? If you don’t have a financial buffer in place you might not be able to meet surprising expenses.
Step 2 is all about building up your emergency savings fund, which can help you recover from financial setbacks as quick as possible. For an emergency savings fund, it’s advised to have a financial shield of 3 months. If you lose your job unexpectedly you should aim to have enough money in your emergency fund to cover 3 months of everyday expenses such as rent or mortgage payments, food and household bills. Read more about how to build up an emergency fund here.
3. Understand where your money goes
By understanding where your money goes and how savings and debt affect your financial resilience you can take control over your financial position. Some type of payments are fixed, like rent, food and travel costs.
But other types of consumption can be regarded as extra or luxury expenses and importantly are costs which you have a choice over. We aren’t saying you should never buy anything outside of these essential costs but understanding how much of your money goes on these items is key to building financial resilience.
Remember if you are buying these items on credit it means you are buying things before you have the money to pay for them, so you’re turning this into a fixed expense rather than an optional expense.
4. Reduce or eliminate your debt
Owning all your assets outright provides you with more of a financial cushion and increases your security. If you don’t owe money on your house, your car or your watch, for example, you don’t have to worry about losing them if your income is reduced or if you lose your job.
However, this is easier said than done, and reducing your personal debt can be daunting. Make a plan for which debts you want to pay off first, a good place to start is the ones with the highest interest rate then work backwards. Check out this guide for the best ways to pay off your debt.
5. Build up your knowledge
Financial resilience and more generally personal finances can be a challenging world when you have little knowledge. Many of us aren’t taught about emergency funds, investing or even taxes in school so navigating this as an adult can be unknown territory.
Financial resilience requires a base of financial knowledge and it’s key to overall financial wellness. Financial knowledge is really just about confidence so challenging yourself to constantly learn about your own personal finances and ways you can improve your financial knowledge is important. Which is why the Learn section on the Wagestream app is a dedicated hub to offer easy tips and tricks for how to manage your money better, everything from budgeting to better understanding your payslip.
We can all achieve financial resilience, even if we don’t all have the same journey.