five steps to building financial resilience2

What is financial resilience?

Financial resilience is the ability to withstand any unexpected costs without them having a long-lasting impact on your finances. This might be a job loss, reduction in income or a major household or lifestyle expense. In light of recent events, external pressures could also impact your finances.

Debt charity Step Change found that people who had experienced a life event in their household in the past two years were three times more likely to be in problem debt compared to those who had not.

There are increasing concerns that households do not have enough financial resilience to withstand financial pressures and emergencies without turning to bad lenders and credit. However, there are steps we can all take to achieve better financial resilience.

From improving the ability to make ends meet to setting and sticking to our savings goals, Wagestream have identified five steps that you can take to help build financial resilience.

1. A financial plan is key

To become financially resilient you need to set goals to enable you to stay focused on what matters the most. This helps when preparing for things that could shake up your financial situation.

Having a plan and sticking to it is probably one of the key ways to build your financial resilience. A plan is not just a resolution you make on a whim, but a well thought out blueprint for how you are going to make a difference.

To get you started, answer questions like:

  • What do I want to achieve?
  • Why is having a plan important to me?
  • Why have I made previous financial decisions?

Once you have these answers, you can then focus on writing your plan and how you’re going to get to your goal.

2. Build your emergency buffer

You might be saving for a holiday or for a new puppy, but are you saving for the unexpected? If you don’t have a financial buffer in place you might not be able to cover surprising expenses.

Step two is all about building up your emergency savings fund, which can help you recover from financial setbacks as quickly as possible.

For an emergency savings fund, it’s advisable to have a financial shield of three months’ worth of wages. If you lose your job unexpectedly you should aim to have enough money in your emergency fund to cover three months of everyday expenses such as rent or mortgage payments, food and household bills. Read more about how to build up an emergency fund.

3. Understand what you’re spending

By understanding where your money goes and how savings and debt affect your financial resilience can enable you to take control over your financial position. Some types of payments are fixed, like rent, food and travel costs.

Other types of consumption can be regarded as extra or luxury expenses and importantly are costs which you have a choice over. We aren’t saying you should never buy anything outside of these essential costs but understanding how much of your money goes on these items is key to building financial resilience.

Remember if you are buying these items on credit, it means you are buying things before you have the money to pay for them. So, you’re turning this into a fixed expense rather than an optional expense which you should factor into your financial resilience plan.

4. Pay down or eliminate your debt

Owning all your assets outright provides you with more of a financial cushion and increases your security. If you don’t owe money on your house, your car or your watch, for example, you don’t have to worry about losing them if your income is reduced or if you lose your job.

However, this is easier said than done. Reducing your personal debt can be daunting. Make a plan for which debts you want to pay off first. A good place to start is the ones with the highest interest rate then work backwards. Check out this guide from the Money Advice Service for the best ways to pay off your debt.

5. Increase your knowledge

Financial resilience and personal finances can be daunting when you have little knowledge. Many of us aren’t taught about emergency funds, investing or even taxes in school so navigating this world as an adult can be unknown territory.

Financial resilience requires a base of financial knowledge and is key to overall financial wellness. Financial knowledge is really just about the confidence to make the right decisions and knowing what you’re dealing with. There are so many resources at your fingertips and a little time can go a long way.

We can all achieve financial resilience, even if we don’t all have the same journey.

Wagestream work with your employer to let you track your wages in real-time, stream the money you’ve already earned and save your wages straight from your salary. To find out more, click here.

Additional resources which you may find helpful

Remember if you are experiencing financial difficulty, you can apply for a non-repayable grant to support you during this worrying time.

Apply for a grant