So what can you do to build financial resilience?

Expect the unexpected

Rarely do we get advance warning that something bad is about to happen to us, so the time to develop your resilience strategy is now. And while we don't know the specifics, we may sometimes be able to anticipate the events that could throw our finances into disarray such as the death of a spouse or caregiver, increased cost of living, car and house expenses, and even floods and fires. If you are starting to experience financial hardship, or expect that it could be just around the corner, start to make a plan. Do you have insurance cover? Do you have an emergency fund? Are all Wills up to date? Most lenders also offer financial hardship assistance if you're struggling to make loan repayments. Your options may include setting up a payment plan or temporarily altering your loan repayments to help alleviate some of the financial stress.

Create buffers

You can't insure against every possibility, but you can build financial buffers. This might simply be a savings account that you earmark as your emergency fund that you contribute to each payday. If your home loan offers a redraw facility you can also create a buffer by getting ahead on your mortgage repayments.

Buffers can be particularly important for retirees drawing a pension from their super fund. Redeeming growth assets for cash in order to make pension payments during a market downturn can lead to a depletion of capital and reduction in how long the money will last. By maintaining a cash buffer of, say, two year's worth of pension payments, redemptions of growth assets can be deferred, giving time for the market to recover.

Cut costs

In difficult economic times cost cutting can help you maintain your financial buffers and important insurances.

The key to cost cutting is tracking your income and expenditure and that could mean doing a budget. There are a lot of great budgeting apps, or, if a traditional budget is not your style, try 'bucketing' for a simple and effective way to manage your spending and savings.

Check out our blog What is bucketing and how can it help you save?

Invest in quality

If you're an investor, there are many companies out there that have long track records of consistently pumping out profits and dividends. They may not be as exciting (i.e. volatile) as the latest fad stocks, but these blue chip companies are more likely to maintain their value than the newcomers in market.

The other key tool in creating resilient portfolios is diversification. Buying a range of investments both within and across the major asset classes is a fundamental strategy for managing portfolio volatility. With a well-diversified portfolio of quality assets there is less need to regularly buy and sell individual investments.

Take advice

Building financial resilience can be a complicated process requiring an understanding of a range of issues that need to be balanced against one another and prioritised. Chatting to a financial planner can assist you in developing your own, personalised plan for financial resilience. 

Published: Friday, 24 Jun 2022