When it comes to your finances, they’ve gotta be rock-solid that even a gigantic puff of smoke (ahem, a big market crash) doesn’t send the whole thing up in flames. That would just be painful, and super costly. It will weigh on you like a tonne of bricks. After all, 3 in 4 people admit to feeling anxious about their finances. So getting that on track is top priority. Or at least should be!
You don’t need me to tell you that we’re in pretty tricky economic times. We’ve endured a year of double-digit inflation that’s the highest it’s been in 40 years plus interest rates hitting levels not seen in 14 years. That’s already put a massive strain on our finances but we’re looking at a possible (what some are calling probable) recession this year.
How bad will that get? Dunno. I wish I could tell you! But the honest truth is that no one really knows. Look at all the big banks’ predictions for 2022 and you’ll just laugh. They look like clowns. It’s so humbling though – markets kinda have that effect!
Recessions usually come about every 5-7 years. A recession, btw is a period of at least 6 months of a shrinking economy. It’s not good. It’s when demand comes crashing down and businesses get freaked out that they start firing workers. Then everything goes downhill from there. It’s nasty and govs wanna do all they can to avoid it but it’s often the medicine that an overheated economy must take.
The cracks are already starting to show. Layoffs are gathering pace (a classic sign going into a recession). Goldman is firing 3,200 folks this week marking the biggest redundancies for the bank since ‘08. Not a good sign. Then, over in tech, they’ve had a real rough of it. Though I read a cool and comforting stat that ~60% of laid-off tech workers find jobs within 3 months! They’re that good, and in demand. But it’s kinda worrying nonetheless, especially if you’re the 40% who wait longer to find jobs.
If now isn’t the time to start building your financial resilience then I dunno when will be!
Financial resilience is basically how quickly your finances can bounce back after a shock to the system like losing a job or a dependent. When in a crisis like that, having financial resilience will reduce the pain by 100X. It will help you get back on your feet.
But in that moment, it’s too late to do anything. If your finances can’t handle the shock, then they won’t. Nothing you can do. Same thing as insurance, it’s pretty useless purchasing it after the fact since it won’t protect you now, only for future events. But people will only start protecting their home (with burglary alarms, safes and whatnot) after a burglary! Fascinating how the human psychology works.
You’ve gotta build your resilience in the good times
And even the well-off who earn >$250 who, btw, live paycheck-to-paycheck. (Read here the shocking truth behind that). What on earth would they do if they lost their job?! They’d have nothing to fall back on. So they’d have no choice but to resort to consumer debt, with interest at 20% on average. Ouch.
Luckily this can all be avoided by putting aside money during the good days for the rainy ones and living below your means.
If you know someone who’s been laid off and is struggling, you’ll know how important it is to have a back-up. A financial one. A friend of ours is a dentist and during covid, he was placed on furlough which paid him 80% of his salary up until £2,500 a month.
This guy had mortgages, bills and all sorts of other expenses that £2,500 simply wouldn’t cut. He was genuinely concerned. They had little to no savings on the side. No one saw covid coming and that a super-stable profession like a dentist would be out of work!! But the unimaginable happened. So don’t be complacent. Anything can happen to anyone.
So plan ahead. If disaster strikes, I promise you you won’t be able to put a price on that peace of mind your financial cushion and living standard will give you.
Here are 3 steps to help you do just that.
#1 Low debt
Think of debt as a multiplier. Sure, it’ll make the good times 10X better but they’ll also make the bad times 10X worse. Not many of us gave much thought to this when interest rates were stuck to the ground like glue. You’d have been daft not to take on debt at this rate aka load up on a big mortgage and have your money working harder for your elsewhere (that other place was usually the stock market!).
But now, the price of money (measured by interest rates) isn’t 0. It’s the most expensive it’s been in 14 years which means that the cost of debt is going up.
But even when rates are low, having low debt means your finances can handle a drop in income more than if your monthly expenses were higher. It’ll give you loads more wiggle room should things go wrong. The higher the debt the more tied you are to your monthly paycheck and the more reliant you are on not losing your job.
#2 Get your emergency fund in order! Now!
You must have an emergency fund of AT LEAST 3 months worth of expenses. This is everything but your discretionary (extra) spending. It’s your mortgages, your utilities, your groceries. The whole bang long. The more months of expenses you have covered, the stronger your financial resilience. Start with 3 months then aim for 6 and eventually 1 year of expenses for the ultimate gold standard!
You’ve gotta be able to access this money on a moment’s notice so best to keep it in a high-yielding savings account or in cash. Whichever you prefer. The point is not to go investing this money or worse, spending it! It’s just for emergencies.
So that if something comes up your finances won’t be in too much of a pickle. Oh and if an emergency spending thing comes up and you dip into your rainy-day fund, don’t forget to top it back up.
#3 Don’t forget your insurance
The time for insurance is not when you’ve been burgled or have lost a loved one. The time for insurance is way before all that ever happens. If you don’t have life insurance, get on it.
Life insurance pays out either a lump sum or regular payments on the death of the policyholder, giving their dependants financial support after they’ve gone. The amount of money paid out obviously depends on the level of cover you buy.
Then there’s disability insurance which insures the beneficiary’s earned income against the risk that a disability stops them from being able to work. There are other types of insurance but these are the main ones. Life insurance is when you have dependents. People relying on your for financial support. Like your spouse and kids.
You should be able to pay for insurance via your workplace so it’s worth looking there. Think of insurance as your security for when the plan doesn’t go to plan and the worst does happen.
Hopefully you’ll never ever have to use it but it’s there. And that will give you peace of mind. Someone I know recently passed away, in his early 40s, and a couple years before he died he took out life insurance. I can’t imagine what would have happened if he didn’t.
Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment