5 Tips for building financial resilience

Resilience is the ability to quickly recover from setbacks. While setbacks can come in many forms, many will have a financial component. So what can you do to build your financial resilience?

Expect the unexpected

Rarely do we get advance warning that something bad is about to happen to us, so the time to develop your resilience strategy is now. While we don’t know the when, we can anticipate events that would throw our finances into disarray. A house burning down or a car being stolen. Being unable to work due to illness or injury. The death or illness of a breadwinner or caregiver.

We can insure against many of these events. If you have taken out an insurance policy, you’ve already made a start on your resilience plan.

Create buffers

Whilst you may be unable to insure against every possibility, you can build a financial buffer. This might simply be a savings account that you earmark as your emergency fund that you contribute to each payday. If your home loan offers a redraw facility, you could also create a buffer by getting ahead on your mortgage repayments.

Buffers can be particularly important for retirees drawing a pension from their super fund, to help ride out market fluctuations when you don’t have an additional income. Maintaining a cash buffer can assist by deferring the necessity to redeem growth assets during market downturns.

Cut costs

The internet abounds with tips on how to cut costs and save money. In difficult economic times, cost-cutting can help you maintain your financial buffers and important insurances. The key to cost-cutting is tracking your income and expenditure and yes, that means doing a budget, so you can make more mindful choices about your expenditure.

Invest in quality

There are many companies out there that have long track records of consistently pumping out profits and dividends. They may not be as exciting (or volatile) as the latest techno fad stocks but when markets get the jitters these blue-chip companies are more likely to maintain their value. This is important, as the more volatile a portfolio, the more likely an investor is to sell down into a declining market. This turns paper losses into real ones, depriving the investor of the opportunity to ride the market back up again.

The other key tool in creating resilient portfolios is diversification. Buying a range of investments both within and across the major asset classes is a fundamental strategy for managing portfolio volatility. With a well-diversified portfolio of quality assets, there is less need to regularly buy and sell individual investments. Unnecessary trading can create ‘tax drag’ where the realisation of even a marginal capital gain triggers a capital gains tax event and consequent reduction in portfolio value.

Take advice

Building financial resilience can be a complicated process requiring an understanding of a range of issues that need to be balanced against one another and prioritised. Your financial planner is ideally placed to assist you in developing your own, personalised plan for financial resilience.