Financial Resilience

Resilience is defined as the capacity to recover quickly from difficulties. It is dependent on one’s ability to adapt and be flexible. It requires elasticity, so that when one is stretched, one could soon spring back into one’s original shape. Financial resilience therefore implies the ability to withstand changing financial conditions and revert to status quo or even higher levels soon afterwards. This proficiency is particularly useful at this time of volatile economic changes.

The first step in financial resilience is a good and never-ending financial education. We must know how to achieve and maintain financial success, understand what works and does not work, be aware of social, economic, and political events that can impact our financial well-being, and know how to respond to such events profitably. The economic and financial space is evolving at a fast pace, our financial intelligence must keep pace with the changes.

One key asset that can help maintain our financial stability is an emergency fund. A cash or near-cash asset (usually invested in money market instruments like fixed deposits, government and corporate bonds, and treasury bills) that can be used to cover unforeseen financial stress. The rule-of-thumb is that an emergency fund should be able to cover six months living expenses – food, rent, utilities and other basics. So, not only can it be used for unexpected car and house repairs, but it is a good fall back in the case of retrenchment. Whilst one is looking for another job, one can take one’s time without desperately accepting just any position, also one does not need to sell assets in order to maintain one’s lifestyle. This is truly financial resilience.

Financial resilience is hampered by a large personal debt portfolio. If one is obligated to make monthly repayments to creditors, financial stability is at risk. Therefore, to achieve financial resilience start bringing down your personal debt until monthly repayments account for less than 15% of your monthly salary. The additional disposable income should be channeled into building your investment portfolio, which will in turn build your wealth and income, thus positioning you for increased financial stability and resilience.

To maintain financial resilience, we must plug the financial leakages. The biggest threat in this category are medical expenses. Poor health has a double barrel effect on financial stability; firstly, it prevents one from working hard to earn a good living and secondly the cost of managing bad health erodes any wealth one has generated in times past. That is – it prevents wealth growth and reduces existing wealth. It is therefore important to frontally attack the potentially devastating effects of poor health on our financial resilience. Maintain a good work-life balance, eat well, rest enough, exercise appropriately and avoid excesses and addictions. Undergo periodic comprehensive medical exams. To ensure you do not have to bear the burden of medical expenses, obtain sufficient health insurance, and pay the premiums as and when due. Conduct sufficient due diligence on your HMO to ensure that your policy covers all your demands and you are obtaining value for money.

Generally, insurance is a good tool for maintaining financial stability as the underwriter reimburses the policy holder with financial losses resulting from negative events. Comprehensive vehicle, house, and householder policies would maintain our financial resilience, and we would not need to sell assets in order to restore lost items. Financial resilience is not just for the individual, the family and household must enjoy the same. Therefore, it is important for breadwinners to purchase adequate life insurance in order for their loved ones to weather the initial financial storms that would accompany their untimely demise.

Obviously, financial resilience would improve with increased income because the additional money would serve as a shock absorber in the event of financial shocks. So, always be on the lookout for avenues to build your income-generating assets. In previous articles, we discussed that in order to maintain a good work-life balance, we should prioritize passive income over active income. What good is having a second job or a side hustle if the additional income would be spent on increased medical expenses? Also, we must be careful not to fall victim to this adage – expenses always rise to meet income. Do not increase your consumption simply because your income has increase. If we do that, then the additional income would not be available to serve as a shock absorber, and we would not have increased our financial stability in any way.

We must develop financial resilience at this time of rising costs and volatility in employment. It is good for our finances, and it is good for our emotional and overall well-being. Happy investing.

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