Research shows that 71% of adults in developing countries have a financial account. Despite this statistic, only 55% can be resilient to financial shocks. The rest find it difficult or impossible to access emergency money when such situations happen.
If you want to improve how you manage your money, what steps can you take to increase your financial resilience? Why is it important to become financially resilient?
This article discusses how to increase your financial resilience and explains why such resilience is essential to your well-being.
Financial resilience means carrying on through life despite the setbacks affecting your income or assets. Learning the steps to become financially resilient can help you better manage your money regardless of life’s challenges.
Being financially resilient can give you a better chance at handling life events like sudden and severe health conditions, property damage, and debt repayment. For example, Debt Hammer’s tips on getting out of payday loans can help you address loan debt quickly.
Keep reading to learn how to increase financial resilience and handle money better, especially during economic challenges.
Ways to Improve Financial Resilience
Financial resilience involves investing in your financial resources like savings and health insurance. One of the ways you can achieve this improvement is by ensuring that you have a decent-paying job that contributes to your savings, insurance, and daily living costs.
Working in a well-paying job requires investing in human capital, which is another way to enhance your financial resilience. According to economists, human capital consists of all the knowledge, experience, skills, contacts, and other qualities a person has that are valuable to potential employers.
In other words, having enough human capital can help increase your chances of landing a great job or advancing your career to achieve better financial security.
Once you have enough savings, you can build up your emergency fund. You may think you don’t need that fund now. But having the money reserved for unforeseen situations can save you trouble later on, especially when you’re short on cash for basic needs.
You may encounter an injury-causing accident or break the laptop you need for work. An emergency fund can help cover the costs for those situations.
For good measure, consider building an emergency fund that can last for at least three months. This way, even if you lose your job, your fund can cover your living costs for this period, hopefully until you find employment again.
Financial resilience isn’t all just about money. Personal health is also part of human capital because health can affect your productivity and job performance. Notice how you’re likely to under perform or miss work days if you’re sick. Keeping yourself healthy can have a positive effect on your financial resilience.
Researchers at the University of Minnesota mentioned five characteristics that help improve financial resilience despite life’s challenges. These five traits are being positive, focused, flexible, organized, and proactive:
- Positivity. Optimistic people view difficulties in life as opportunities to become better. They can reframe adverse outcomes as lessons and strive to create solutions to prevent such consequences from happening again.
- Focus. People focused on their goals can determine the direction they want to take and stick to their plan to achieve those goals. Even when life events and other hurdles get in the way, these people do not allow such barriers to stop them from reaching those objectives.
- Flexibility. Flexible individuals can adapt to changing situations and welcome new and different solutions to achieve specific goals.
- Organization. Well-organized individuals can set priorities and develop structured processes and backup solutions to help manage changes.
- Being proactive. Like flexible individuals, proactive people can adapt to and work with change instead of fighting it. These people can also seek opportunities to enact such changes instead of waiting for something good to happen.
Improving financial resilience isn’t just an individual task. Even policy makers can encourage responsible financing to help improve resilience and reduce financial stress by doing the following:
- Encouraging manufacturers to design high-quality products that help consumers prepare for, manage, and recover from financial shocks
- Measuring and evaluating these solutions to see how they result in changes in well-being
- Informing consumers about predatory financial practices, what these processes look like, and the risks of becoming a victim in ways that users can understand
Why Financial Resilience Is Important
Being financially resilient is essential in holding or improving your standard of living while preventing or minimizing the adverse effects of expected or unexpected financial shocks.
People can experience financially stressful situations at the individual level, like health problems, disability, and the loss of a job. But large-scale financial events like stock market crashes, recessions, and terrorism can also impact many individuals.
In developing countries, more than two-thirds of adults worry about one or more of the following sources of financial stress:
- School or education costs
- Monthly bills and costs
- Medical fees due to a severe illness or accident
- Living costs for old age
Additionally, 22% of adults in these countries worry about all four issues mentioned above. In such cases, financial resilience can help protect your money or reduce financial losses while still allowing you to cover the above mentioned issues. And when you’re financially resilient, you have a better chance of keeping your standard of living despite the financial challenges you may face.
Photo Credit: Alexander Mils
Very interesting article. Thank you!