Financial resilience is your ability to bounce back if a financial trauma occurs. Anything from a job loss to a medical bill can throw you off course if you don't have a strong system in place.
FICO's new Resilience Index, launched in June as a response to the coronavirus pandemic, measures how easily a person might bounce back from a challenging situation. Just 21% of U.S. adults report having no emergency savings — the lowest figure recorded in the 10 years Bankrate has conducted this poll and down from 28% last year. But 35% of Americans say they have less in emergency savings now than they did before the pandemic, compared to 13% who say they have more savings now, the survey says.
"More people have something put away than in years past — strong economy prior to the pandemic, plus stimulus payments and enhanced federal unemployment compensation since," says Greg McBride, chief financial analyst at Bankrate. "But the pandemic is chipping away at what people have. The progress seen versus last year could prove fleeting if prolonged unemployment forces more people to deplete their savings."
Changes related to how you earn, spend, and save your money can all make you more financially resilient and capable of handling a crisis. Here are five tips from experts.
Continue to learn new skills, because the job market is always changing, says Ivory Johnson, a certified financial planner and founder of Delancey Wealth Management. "Today you might have an occupation that's prominent, but then it gets marginalized overnight."
When thinking about boosting your skills, Johnson suggests you keep this Albert Einstein quote in mind: "Life is like riding a bicycle: In order to keep your balance, you must keep moving."
If you need to get some additional education to be more marketable, there are many affordable options out there. "You can spend $500, $1,000, $1,500 and get a certificate, and create a whole new skill set," Johnson says. "That way you reinvent yourself without a big capital outlay."
One way to stay resilient in case of job loss is to get an additional source of income. "What we've found is a lot more people, even if they don't need the income right now, they're getting a side hustle," says David Abate, a certified financial planner at Strategic Wealth Partners.
Almost half of consumers are looking to pick up extra income via a part-time job or side hustle, according to a new survey from FlexJobs and Prudential. Technology has made this easier than ever, says Abate.
You can use freelancing platforms like Fiverr and Upwork, or take to social media to share with your network about your skill set and the type of work you are looking to do. "Thinking about what your strengths are and what you can offer, building up your resume when things are going well, it really helps prepare you when you actually need to rely on this income for a period of time," says Abate.
A side hustle is also a great way to test out a new field you're interested in, says Johnson. "So if you do need to make that pivot, you can demonstrate now that you've already done it before." It can also help you save up for an emergency fund.
Explore where your money behaviors and habits come from, says Johnson. "If you've maxed out your credit cards, if you have no emergency fund, some of that is a function of the decisions you've made," he says.
Step back and figure out what may have led you to make those choices, he suggests. Think back to your childhood and how you first learned about money.
"You have to identify, 'Why did I get into this trouble to begin with?'" says Johnson. "Otherwise it's just an academic exercise. It's like weight loss. People lose it and then they go back to their old habits."
The Resilience Index places a high emphasis on your debt-to-credit ratio, says Abate. This is the amount of debt you owe, compared to how much credit you have available to you. "The goal there is to see how well you as a borrower are going to hold up when the economy takes a downturn," he says. "The higher you are to maxing out that ratio, the more they're going to look at you as a high risk for borrowing."
So you want to make sure you that you have an ample amount of available credit to balance out your debt. But that doesn't mean you should pile on the credit cards, Abate says.
"There's a sweet spot for the number of cards you want to have in your name," he says, as having too many cards can make you look like a risk to lenders. "If you have one, it makes sense to get a second. But if you have five, it's going to make sense for you to call the lender and request that they increase your credit limit."
Paying your bills on time is the most important step in getting your traditional FICO score up and demonstrating to your lender that you are a low credit risk, says Abate. "That's only going to help to serve you in the future, because you're going to get presented with offers for a higher borrowing limit and lower borrowing rate. So you're really just helping yourself out by doing that."
A higher borrowing limit can help you if you need a larger loan, and a lower borrowing rate means you'll spend less on interest.
Automation is a key part of your game plan for paying bills on time, Abate says. "Banks make it so easy nowadays with the technology built in, in terms of setting up autopay on a recurring basis, to really take the thinking out of it every day." If this isn't an option, you can plug a reminder into your phone's calendar to prompt you to take action, he says.
With everything in order, you'll be better able to handle any challenges that may arise.
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