Improving your Financial Resiliency – Episode 142

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Improving your Financial Resiliency – Episode 142

You’ve probably heard the phrase “never waste a good crisis”. The origins of this quote aren’t clear, though some point to Winston Churchill. Regardless, its point is that in times of crisis, habits and practices are forced to change. When things are going well, it’s easy to just let things float along. Some changes need a shock to bring them about.
In this current period of turmoil and worry, a change that might be valuable in your financial life is improving resiliency – the ability to withstand adverse times. If you’ve been unfortunate enough to be put out of work, these might need to wait until we return to normal later in the year. But hopefully you can at least be planning now for how you will bounce back stronger than ever.

Here’s my five ways you can improve your financial resiliency:

  1. Emergency Fund

An emergency fund is your pool of money set aside for a rainy day. When times are good it’s easy to conclude this is unnecessarily cautious. But when the road gets bumpy, the financial shock absorber provided by an emergency fund is invaluable.
3 months normal income is the rough rule of thumb guide. If you’re a contractor, casual worker, or small business, ideally you would have more than that.

Your emergency fund could be a simple savings account. If you have a mortgage it could be an offset account, or re-draw capacity. Perhaps even an unused Line of Credit. What you’re trying to avoid is the credit card being your solution.

  1. Reduce Debt

Loans need to be repaid, whether you’re in prosperous times, or challenging ones. If your income gets cut, the need to meet debt repayments becomes a weight around your neck. Perhaps instead of using your next tax return or bonus to take a holiday to Thailand, you pay it off the car loan or mortgage instead. A strong personal balance sheet certainly provides financial resiliency in times of stress.

  1. Multiple income sources

Whilst not always avoidable, being reliant on a single source of income makes you far more vulnerable to an economic downturn. Are there ways you can diversify your income sources?
For couples this might be ensuring you don’t each work in the same industry sector. If you’re a casual, perhaps you try and split your time between two employers, rather than only making yourself available to a single business. You could have a small side hustle business going, that you could put more time into if your main income source dried up. (Check out episode 135 How to Start a Side Hustle in Australia for a detailed look at this approach.) If you’re self-employed, it’s ensuring you aren’t too reliant on a single client, and where possible having multiple offerings so you have something to sell, even during tough times.

  1. Get your personal insurance fit for purpose

Is your Income Protection insurance matched to your needs? Do you even have Income Protection insurance?
Personal insurance is certainly an area that’s easy to push to the bottom of the to-do list. But when it comes to financial resiliency, having an appropriate financial safety net in place is hugely important.
Income Protection replaces 75% of your income if you are unable to work due to illness or injury. It won’t help in the event of unemployment – that’s what your emergency fund is for. But it will protect you in plenty of other adverse situations.
There is also Life, Total and Permanent Disability, and Trauma insurance that all have a role to play in your robust financial safety net.
Need help reviewing your insurances? You can book an appointment with us here.

  1. Worst Case Scenario planning

This is a strategy I’ve found very useful over the years. If you’re worried about something, take a moment to write down a few outcomes in the event your worst case should occur. Next write down what you would do if they were to occur.
So for instance if you’re worried about losing your job, then a worst case scenario might be being unable to pay the rent or mortgage. What would you do? If you’re renting, perhaps you would ask the landlord for a few months of deferred rent which you can catch-up once working again. If that won’t work, you move out and stay at your sister’s house until things improve.
If you’re a homeowner perhaps you rely on your redraw capacity to cover loan repayments for a time. You might speak to your bank and renegotiate repayments. Or perhaps you sell up and rent somewhere for a while.
Everyone’s scenarios and solutions will be different, but the point is that by running through these and having a plan, even a fairly unpalatable plan, you can relieve a lot of stress. Also, having identified these potential worst cases, you can think about strategies in advance to reduce the chance of them occurring in the first place, thereby achieving our goal of increased financial resiliency.
I hope these ideas can help you. It’s challenging times at present, but they wont last forever.

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