Economic resilience provides a safety net that you may rarely use. But you'll be glad to have it when you need it.
“Households can recover economically if they are prepared to face unexpected economic shocks,” said Emerson Sprick, deputy director of economic policy at the Bipartisan Policy Center think tank in Washington, D.C.
Shocks can include unexpected medical bills, home repair costs, and loss of income due to layoffs. They are “unpredictable in their timing, but we generally know that they occur throughout life,” Sprick added.
Considering that we are all likely to face financial shocks at some point, here are some ways to increase your financial resilience.
Lock down cash flow
“Sometimes you just go out and spend money without thinking,” says Troy Anthony Anderson, who develops the Financial Education Extension Program at the University of Maryland, Calvert County. That's why he recommends writing down your expenses and tracking exactly where your money is going as a first step to figuring out what to cut back on, like eating out or going to the movies.
Anderson suggests planning out your entire month so you don't overspend each paycheck. “Ask yourself, 'Do I really need to eat like a king or queen once I get paid?'” The direct deposit clears and you go to a Texas roadhouse or outback, but the next week has no money and has to make peanut butter and jelly,” he says.
To keep her plan on track, Anderson keeps a limited amount of cash in her wallet for discretionary spending and writes down what she can spend it on on a sticky note that she keeps with the cash.
create savings
Although setting aside three to six months' worth of expenses as traditionally recommended is out of reach for many people, it's worth the effort to save, says Business Development at Money Management International, a nonprofit financial counseling and education organization. said Kate Bulger, vice president.
“The more savings, the better. That savings can put people on the path they need to get through difficult times,” she says. Keeping these savings in a high-yield savings account allows your money to grow over time while remaining safe.
Additionally, saving for retirement can strengthen your long-term financial resilience, Sprick says. Many workers can take advantage of employer matches and tax-advantaged accounts such as 401(k)s to build retirement savings. Contributing even a small amount each pay period can lead to significant savings over many years of work, especially if the funds are compounding.
protect your credit
Bulger says keeping your credit card balances as low as possible will leave you with a line of credit available for emergencies. “Credit cards are a great tool for dealing with short-term difficult situations. If you can afford a credit card, you can use it that way,” she says. You can then minimize interest charges by paying off your balance as soon as possible.
Otherwise, Sprick warns, it's easy to get caught up in a “vicious cycle of debt and poverty.” For example, if he has a credit card that charges 20% interest and he needs to pay for a $300 car repair, he will be charged about $5 in interest every billing cycle until it is paid off.
“Especially now, with interest rates so high, it's easy to get stuck in a cycle of debt that you can never break out of,” Sprick says.
Discuss financial priorities
Bulger says you can prepare for a financial shock by talking with your family about how to cope before it actually happens. She suggests prompts such as:
— What is most important in our financial life?
— What are we saving for?
— If necessary, what expenses would you cut first?
“It's easier to coordinate if you've talked about it beforehand,” Bulger said.
At the same time, discussing financial issues with family and friends can help you feel emotionally supported. “We know that many people are struggling with financial strain, but financial hardship can be incredibly isolating,” Bulger added.
rely on the community
Bulger said there are food banks, government programs and school-based aid in the community that can help people going through difficult times. She also suggests turning to other resources to help you change your saving and spending habits, such as nonprofit financial counselors and online how-to budgeting videos.
No matter how you seek support, try not to dwell on setbacks. Daniel Millan, managing partner at Cornerstone Financial Services in Southfield, Michigan, says, “Just like in the stock market, don't focus on what's in front of you, focus on the future.” suggests that it may be helpful.
“You can't control every day, but history has shown that if you plan for the long term, your averages over time will work out,” he says.
Sometimes you have to overcome the lows.
This column was provided to The Associated Press by the personal finance website NerdWallet. The Content is for educational and informational purposes only and does not constitute investment advice.
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Kimberly Palmer is a personal finance expert at NerdWallet and author of Smart Mom, Rich Mom. Her email: kpalmer@nerdwallet.com. X: @KimberlyPalmer.
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