Financial flexibility provides a safety net that you rarely use — but when you need it, you'll be glad you have it.
“A household has financial resilience if it is prepared to face unexpected financial shocks,” said Emerson Sprick, associate director for economic policy at the Bipartisan Policy Center, a think tank in Washington, D.C.
Shocks can include costs such as a surprise medical bill, home repairs, or loss of income due to layoffs. They tend to be “unpredictable in their timing, but we generally know they will happen throughout our lives,” Sprick added.
Since we're all likely to face financial shocks at some point, here are some ways to improve your financial resilience.
Secure your cash flow
“Sometimes we go out and spend without thinking,” says Troy Anthony Anderson, who develops financial education extension programs for the University of Maryland in Calvert County, Maryland. That's why he recommends writing down expenses to track exactly where the money is going. The first step towards knowing what to cut, such as going out to eat or going to the movies.
Anderson suggested planning the entire month so you don't overspend every time you get money. “Ask yourself: Do I really need to eat like a king or queen when I get paid?” The direct deposit clears and goes to Texas Roadhouse or Outback, but then the next week [you] “I don't have the money and I have to make peanut butter and jelly,” he said.
To stay on track, Anderson keeps a limited amount of cash in his wallet for discretionary expenses and writes what he can use it for on a sticky note that stays with the cash.
Create a savings reserve
Although the traditionally recommended three to six months of spending increases is out of reach for many people, it's worth striving to make some savings, says Kate Bolger, vice president of business development at the nonprofit financial consulting and education organization Money Management International. .
“The more we can save, the better,” she said, “and having these savings gives people the path they need” to get through tough times. Keeping these savings in a high-yield savings account can allow the money to grow over time while remaining safe.
Additionally, retirement savings can boost financial flexibility over the long term, Sprick said. Many workers can take advantage of employer matching and tax-advantaged accounts such as 401(k) to help build retirement savings. Contributing even a small amount each pay period can result in significant savings over the working years, especially when earnings compound.
Defend your credit
Keeping credit card balances as low as possible can leave those lines of credit available for emergencies, Bolger said.
“Credit cards are a great tool to use during short-term tough times. Having space on your credit cards allows you to use them that way,” she said. “So, paying off the balance as quickly as possible helps keep the interest to a minimum.”
Otherwise, Sprick warned, it's easy to fall into a “harmful cycle of debt and poverty.” For example, if you have to pay a $300 car repair bill on a credit card that charges 20% interest, you'll be charged about $5 in interest per billing cycle until you pay it off.
“Especially right now, with interest rates this high, it's easy to get stuck in a cycle of debt that you can never get out of,” Sprick said.
Talk about your financial priorities
Discussing how to deal with financial shock with family members before it actually happens can help you prepare for that moment, Bulger said. The following claims were proposed:
What are the most important things in our financial lives? What are we saving for? What expenses will we cut first if we need to?
“If you have that conversation early, it's easier to make adjustments,” Bolger said.
Meanwhile, talking about financial challenges with family and friends can help you feel emotionally supported.
“Financial hardship can be incredibly lonely even though we know a lot of people are going through financial hardship,” Bolger said.
Communities often have food banks, government programs and school aid that can help people going through a difficult time, Bulger said. She also suggested turning to resources like a nonprofit financial advisor or online budgeting guide videos to help support you through changes in your saving and spending habits.
No matter how much you look for support, try not to think about setbacks. As with the stock market, it can help to focus on what's ahead rather than what's right in front of you, suggested Daniel Milan, managing partner at Cornerstone Financial Services in Southfield, Michigan.
“We can't control the day-to-day, but if you have a long-term plan, history has shown us that averaging over time will work,” he said.
Sometimes, you just have to push through the low.
Palmer writes for the personal finance website NerdWallet.
