Financial resilience is the ability to withstand and recover from monetary shocks. This could be due to circumstances in your own life, or it could be broader shocks to the economy that affect you. In a world that is increasingly more connected, economic problems on the other side of the world could have ripple effects on your local economy, too.
By making smart decisions and becoming financially resilient, you can navigate these different financial challenges more effectively, and be better prepared for the future. Let’s explore how exactly you can do that.
#1: Recognizing and Navigating Financial Challenges
If you think back to the Global Financial Crisis (GFC), although it largely took place in the US, its effects were felt all over the world. In fact, countries like Estonia and Ukraine still had depressed economies five years later, making them among the most affected by the fallout.
This is a good example of how the interconnected nature of the world’s economy can lead to unforeseen problems. Keeping an eye on the way things are moving is a good first step to staying resilient. As these global economic trends ebb and flow, different financial instruments react almost immediately. Take the ES futures, for example. This futures market follows the S&P500, allowing traders to speculate, not invest, on how the S&P 500 index will perform in the future. Aside from the value this chart offers traders on seeing how the index is performing at present, some traders use the futures market to speculate on how the index will perform.
Two other areas to consider are interest rates and inflation. Both of these are out of the control of individuals but can have big ramifications on their lives. In recent times, we’ve seen interest rates rise quickly and mortgage repayments skyrocket. This needs to be a consideration for anyone aiming to be resilient before taking on any large debt.
On the inflation side, when your money is worth less than it used to be, this means your regular living costs are going to go up. Those who are financially resilient understand the potential problems that can occur — especially ones out of their control — and come up with a plan to manage them as best they can. Failure to do so can leave you in a bad position.
#2: Building an Emergency Fund
To manage these types of problems effectively, building a financial safety net is crucial. At the core of this approach is creating an emergency fund. How much you need in your emergency fund depends largely on your risk appetite, but say anywhere between three to six months of living expenses is a good starting point.
Your emergency fund exists to provide a form of self-insurance against something unexpected happening. If you suddenly lose your job or a large unexpected bill appears, having something tucked away that you can dip into can be a lifesaver. Another good idea is to store these funds in a high-yield savings account so that your fund continues to grow when you’re not using it, instead of sitting there and doing nothing.
This is all the tip of the iceberg, and there’s really no limit as to how deep you can go into this. Make sure you build up an emergency fund, make sure you are comfortable with the idea of losing what you invest, and start paying attention to what’s happening around the world from an economic point of view. If you like what you see, you can delve into more advanced strategies to gain financial independence. Remember, finance resistance is a discipline, and it takes restraint and planning.
