How to make yourself financially resilient

make yourself financially resilient

Every year the flu kills about 36,000 people in the United States.  Those who die typically have an immune system that is already compromised in some way, such as by age or illness.  In other words, it’s not necessarily the strength of the flu that is so dangerous, but the weakness of some immune systems.

In the same way that the flu virus can disproportionately affect those with weakened immune systems, a financial virus can disproportionately affect those with compromised financial health.  The virus could be something as simple as an unexpected car repair or something a bit more serious like a market crash, job loss, divorce, disability, illness or unexpected death.  How well you’re able to respond to those things depends on how financially healthy you are and how well you’ve immunized yourself against those threats.

Some people are fragile and at risk.  Others are financially resilient.  The closer you get to retirement, the more resilient you want to be so that something unexpected doesn’t derail decades of planning.  Below are five things that, financially speaking, will either make you weak or strong, depending on how you handle them.

How much you owe.  There are many tell-tale signs of a person who is financially fragile and having too much debt is often the most obvious.  When you take on debt, you are bringing future consumption to the present.  That gives creditors a legal claim on your future earnings, which reduces your cash flow, increases the risk that you will run out of money and limits what you can afford to do.  Get rid of your debt, however, and not only will you be more financially resilient, but you can also retire sooner.  Unfortunately, years of low interest rates have encouraged exactly the opposite behavior.  What’s a good level of debt for a retiree?  Shoot for zero.

How much you spend.  If you live at or above your means, you are financially fragile.  That’s true whether you make $50,000 per year of $500,000.  Here’s the good news.  Most of the people reading this likely have the ability to live significantly below their means.  What if you spent 10% to 50% less than you made every year?  Would that give you a certain resilience?  You wouldn’t be worried about an unexpected car repair, I can tell you that much.  So take a stand against lifestyle inflation.  Just because you will earn more money this year than you did last year doesn’t mean you have to spend it.  Set a lifestyle cap and save the rest.

How much you’ve saved.  If you spend less than you make, you’re able to save.  That savings not only protects you in the short term (i.e. emergency fund), but it allows you the financial freedom to live the life you want to live in the long run (i.e. retirement).  In other words, savings is the secret sauce in both security and independence.  How much should you have saved by now?  This article will give you a rough idea.

How well you’ve planned.  Most people don’t have a plan for retirement. They don’t know what they want to do, how much it will cost or whether or not they are on track to save enough to pay for it. Not surprisingly, that creates a great deal of anxiety, uncertainty and—you guessed it—financial frailty.  If you are among the 88% of people who don’t have a written plan, your retirement will probably fall far short of what it could be.

A plan can also help inoculate you against bad decisions.  Sometimes a financial virus takes the form of fear and uncertainty.  When we’re scared, we tend to make unwise and irrational decisions.  To navigate those waters, it’s good to have a North Star.  The wind can blow and the seas can rage, but when you look up, it will be there.  A detailed retirement plan can act as that North Star.  If you have a long-term plan—you know where you are, where you want to be and how you’re going to get there—you can inoculate yourself against short-term fear and uncertainty.    When you have context and you understand the big picture, you’re less likely to be blown off course or panic and make a mistake.  For help with creating a plan, check out my Ideal Retirement Design Guide or touch base with me if you want some one-on-one help.

How well you’ve prepared for the unexpected.  What if something happened to you or your spouse?   Would that derail your finances?  Are your legal and financial affairs in order?  Life is unexpected.  The more “What if?” planning you do, the more resilient you will be in the face of tragedy.  Here are two articles and a guide that can help:

That’s five ways to boost your immunity, harden your defenses and make yourself more financially resilient.  But they only work if you take action.  Modern medicine has given us many miracle vaccines, but they only work if you take them.  So too, financial vaccines are either contagion or cure, depending on what you do with them.

Be intentional,

Joe

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