Now that we’ve touched on investing, PFE lab test and what to do during this Covid-19 financial crisis, let’s rewind the conversation slightly and work on improving your Financial Resilience.
In this post we will introduce the term Financial Resilience and break down how we can best be prepared or resilient moving forward.
We will define Financial Resilience as – “The ability to withstand unforeseen financial storms or hardship; the ability to be prepared for anticipated financial issues.”http://www.personalfinanceexperiment.com
Now that we’ve laid the groundwork and defined what we are talking about, let’s review the definition in more detail.
Financial Resilience – Defined
Let’s start with the first part of the definition; likely the hardest part – “The ability to withstand unforeseen financial storms or hardship”. Let’s break this down; as we all know, if you have been alive for 20+ years our lives can be affected by external circumstances beyond our control – Sickness, disasters, job loss, financial crisis of all sorts can significantly change our financial situation. These are the external factors or black swan events that can occur suddenly and take a mean swipe into our lives – These are the most difficult circumstances to plan for and be resilient against as we don’t know the conditions we will face and certainly not the magnitude. If we have a car accident, weather emergency, health issue – All can either be minor or life altering circumstances and must be dealt with on an individual basis.
A black swan is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. Black swan events are characterized by their extreme rarity, their severe impact, and the widespread insistence they were obvious in hindsight.https://www.investopedia.com/terms/b/blackswan.asp
Now let’s focus on the second part of the definition – “the ability to be prepared for anticipated financial issues.” Let’s break this down as well – as you know, when we own items like cars, electronics, homes, cell phones these items are complex, electronic or mechanical devices that are prone to wearing out or breaking down and this can cause a small or large immediate hardship. If we take the car for example, we can have a mechanical breakdown, flat tire that prevents us from attending an important business meeting or personal event. We can have a mechanical breakdown on our home heating or cooling system causing significant damage if not remedied immediately. These are the kinds of items we want to discuss with the term “anticipated financial issues”, not things we think of everyday, but can be expected over the short and long term period. These are typically not the life altering circumstances as discussed above but can be serious non the less.
What can we do?
So now that we know the unforeseen and anticipated sides of financial resiliency, what can we do about it? Let’s provide some key examples for you to tackle each of these circumstances.
Unforeseen Circumstances- How to Plan
Unforeseen circumstances are the most difficult to plan for as we alluded earlier – due to the unknown event and magnitude involved. However, we should not let this deter us from working to plan for these types of events. Here are some key items that we need in our toolbox:
- Life Insurance – Please do not delay if you are the primary “breadwinner” of your household – You need life insurance to protect the way of life for your family. Consult a broker and purchase 10-20 years of term life insurance; it should be the most cost effective way to protect your family from unforeseen circumstances. The amount should vary based on needs but should be approximately 10x your income.
- Health Insurance – You should also make a priority to have adequate health insurance for you and your immediate family. Depending on where in the world you live, this may be covered privately or publicly through your taxes; either way, health treatment decisions should not be made through a lens of financial cost or the ability to pay for the required treatments.
- Emergency Fund – You should also have a cash buffer account (separate from your daily living expenses) to allow for an immediate reserve of funds to tackle an unforeseen circumstance – If you have a medical issue; covering the cost until the insurance kicks in. If you have a job loss; covering the cost of 2-3+ months of living expenses. This fund can help mitigate a whole host of unforeseen circumstances and should be funded according to your risk tolerance and life circumstances – If you have a stable job, are young and healthy, perhaps it can be 3-6 months of lifestyle costs. If you are older perhaps 1-2 years of cash is required.
Anticipated Circumstances – How to Plan
The anticipated circumstances discussed earlier include cars, electronics, homes, cell phones; are complex, electronic or mechanical devices that will fail and require replacement.
- Separate Sinking Funds – For these items, we are going to suggest only one method to tackle all of them – Separate sinking funds. Now let’s define what we are talking about, a sinking fund is a separate account typically at an online bank that allows for deposits and withdrawal but typically takes a couple of days to accomplish this. If we use Tangerine Bank as an example www.tangerine.ca, this is a Canadian online only bank that is owned by one of the larger national banks. This allows for deposit guaranteed savings (a must) while also having an online only presence. So what do we recommend doing with such a bank – They allow you to setup separate accounts (funds) within the one banking account. Therefore, we recommend that you have a HOUSING FUND, CAR FUND, VACATION FUND, ELECTRONICS FUND and set these up as separate accounts within this online bank – This will allow you do manage your risk should you car get a flat tire, cellphone stop working or any other anticipated circumstances arise.
So now we have tackled both the unforeseen and anticipated circumstances and build ourselves a little buffer; improving our financial resiliency. You can start this today by opening an online account or setting aside money elsewhere in order to plan for the unexpected or the anticipated issues that arise. Either way, you will be in a much stronger mental position to work through these issues with life insurance in place, health coverage for your family, 1k+ in your car fund, 5k+ in your home fund and $500 in your electronics replacement fund should you need it.
This should help you become more resilient (not impervious) to these issues discussed above, with improved confidence to tackle these issues head on should the arise.
Did we miss anything here? Let us know how you plan for these items – Is there another way you use to keep yourself resilient to these issues?
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2 thoughts on “Are you Financially Resilient – How to protect yourself?”
[…] Are you Financially Resilient – How to protect yourself? […]
[…] For the mover personality, if you have a tendency to ignore personal finances, please take the time to learn, even at a basic level how investing can help you work less and enjoy life more – See our previous article for some motivation on working 70% less and meeting your lifestyle – Saving VS Investing – How to Meet your goals with 70% less effort? – Personal Finance Experiment. Ignoring the future doesn’t make it any less real. You may not notice the differences within a 2-3 year term, but likely after a decade or two of work, you can look back and see that your wealth hasn’t increased or perhaps more debt has been accumulated. This can be dangerous over the long term and potentially limit your options in old age. Take control today of setting some goals to help yourself – Are you Financially Resilient – How to protect yourself? – Personal Finance Experiment […]