Financial Resiliency Involves More Than Just Money
Before COVID-19, many Americans were not prepared for a financial emergency. In fact, in March of 2020, a financial literacy survey revealed that 27% of participants were unable to pay their bills on time, let alone save for emergencies. Further, 58% said they struggled to minimize their debt – with 19% of those people citing “unexpected financial emergencies” as the main reason for that struggle.
These statistics from the beginning of the pandemic are alarming on their own; however, they seem even more grim because many of those who worried about the financial effects of an emergency saw their fears become reality.
An emergency can happen at any time, and when one does strike, we don’t know how long it will last. For this reason, it’s important to be prepared. While having an emergency fund is a critical part of preparedness, it’s not the only part. Financial resiliency encompasses far more than just money. In this article, we’ll talk about how to build multiple forms of capital so you can stay financially resilient for the long haul.
Build Financial Capital
Financial capital includes all the financial assets on which you can rely: cash, savings, retirement funds, and investments. In an emergency, you’ll need financial capital to help you pull through, but you’ll want to spread it out and avoid putting all your eggs in one basket.
Some ideas to build financial capital include:
Keep an Emergency Fund
Calculate how much three to six months of living expenses would be and save monthly until you reach this goal. Your best bet is to keep the money in a high-yield savings account that is separate from the account you use for day-to-day expenses and bills. It’s important that this money is not easily accessible and kept for emergency use only.
If you already have an emergency fund, consider creating a secondary savings account dedicated to guilt-free fun. That way, you don't have to dip into your emergency fund if you want to travel or splurge on something to improve your quality of life.
Improve Your Debt-to-Credit Ratio
The last thing people need during an emergency is debt collectors breathing down their necks. Avoid this situation by paying down debt now so you can breathe easier later. This might mean negotiating interest rates, revising payment plans, or getting a new loan that works for you.
In 2022, credit card balances are $71 billion higher than in 2021, with inflation playing a large role. If you have high credit card balances, consider consolidating your debt into a loan to help retire your debt sooner.
One of the most immediately effective ways you can build financial capital is to reduce your expenses. Cancel unnecessary subscriptions and search for opportunities to trim grocery bills, utility bills, and any other bills that offer wiggle room. Avoid splurging on unnecessary expenses and learn how to say no to expensive invites.
Be mindful of the lifestyle inflation trap – spending more money as your income grows. If you’re not careful, you’ll spend money on things you don’t really need that you wouldn’t have purchased at a lower income. You’ll wind up having a bunch of stuff that doesn’t matter, but no financial capital. Lifestyle inflation can prevent you from reaching your saving goals, with big financial consequences in the long term.
Invest in Human Capital
Human capital encompasses knowledge and skills (professional or technical), and this expertise can generate income and save you money. For example, your professional expertise earns you an income, and repairing your own car is cheaper than taking it to a mechanic. Growing and investing in your talents can open career doors and lead to more fiscal opportunities.
Some ideas to build human capital include:
Learn New Skills
Learn new skills and make yourself more marketable by developing experience in a newly learned skill. For example, if you’re a software engineer, consider taking the time to learn a new, exciting tech stack and becoming skilled in it, such as AWS training. You could also venture outside your usual scope and pursue an entirely new endeavor, such as communications. New skills can help lead to new career opportunities, grow your confidence, and even increase your adaptability when obstacles arise.
Become a DIYer
Instead of paying professionals to do repairs for you, learn to do some things yourself. Mend your own clothes, change the oil in your car, or even cut your own hair. Skip having someone shop for groceries and delivering them (between delivery fees and paying tips, this can really add up), and learn how to do small repairs around the house. Little things add up over time, and you can put all your extra dollars in your savings account. Plus, you’ll feel much more capable and confident in your ability to take care of yourself in a pinch, instead of relying on – and paying – others.
Develop Social Capital
Social capital describes the relationships you have with other people. This includes everyone from family members and friends to co-workers and neighbors. Social support is crucial – when people share each other’s burdens, loads get lighter. If you lose your job, a friend might be able to recommend a new position. If you’re having trouble managing childcare expenses, a family member might be able to provide it to you at a discounted rate.
Ways to build social capital include:
Keep in Touch
Keep in touch with people and nurture both your personal and your professional relationships. Good relationships thrive on reciprocity – no one likes the person who reaches out to others only when they need something! Be a good friend first and keep this as a mantra to develop social capital. People will remember how you helped them in the past and be more willing to come to your aid when you need help. Even when you have a plan and solution in place, if an emergency does happen, emotional support from friends and family can help you weather the storm.
Expand Your Network
Join a professional organization, attend networking events, or volunteer for a cause you care about. This will help you branch out beyond your immediate co-workers. Being a part of an organization is a great way to expand your professional network, keep abreast of new job opportunities, and hone your skills. A strong network also provides support and career advice when challenges arise – there may be people in your network who have been through similar circumstances.
Consider Natural and Physical Capital
Traditionally, natural and physical capital have been more related to industry – such as the ecological and tangible physical resources used for manufacturing. However, we can borrow the terms to also describe the physical and living resources that we rely on.
Tips to develop natural and physical capital include:
Plant a Garden
As you expand and grow your garden, it can really cut down grocery costs. Supplementing your groceries with products from your garden provides fresher and cheaper foods for you – with the bonus of a healthier lifestyle. Health plays a large part in our happiness, and a healthy body is more resilient during tough times.
Keep a Well-Stocked Pantry
When times are lean, like during the economic downturn resulting from the COVID-19 pandemic, having a well-stocked pantry can reduce your grocery bills and reinforce food security. This is especially true when the pantry is stocked with items that are filling, nutritious, inexpensive, and have a long shelf life. Consider foods such as canned soups, dehydrated meats, nuts, oats, dried fruits, and granola bars.
Resilience Takes Time and Effort
Economic resiliency is about much more than just money. While financial capital is often the first type of capital that comes to mind, it is not by any means the only type on which we can or should rely. Other crucial types of capital include human, social, natural, and physical capital. The best time to strengthen your economic resiliency is now – before you need to tap into your resources.
Financial Resiliency Involves More Than Just Money
This blog post was published by Axos Bank on September 14, 2022, and last updated on September 14, 2022.