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Increase Your Financial Resiliency- Part 2

The word "resilience" has been used frequently in conversation and media reports since the events of September 11, 2001. Children, families, communities, and the nation as a whole have all been described as resilient, or having the ability to function well and maintain a positive outlook, despite experiencing highly stressful events. In everyday language, resiliency is the ability to "roll with the punches" and carry on despite life's challenges and setbacks.

Financial resilience is the ability to withstand financially stressful life events, both negative and positive. A previous article described five ways to increase financial resiliency: increase emergency reserves, maintain a low debt-to-income ratio, purchase adequate insurance, stay positive and focused, and develop human capital. This article will describe five additional resiliency strategies.

Develop Social Capital--Social capital can be loosely defined as the investment that one makes in building and maintaining strong relationships with family, friends, co-workers, neighbors, etc. Often, these "significant others" are referred to as one's "support system." Having a strong support system can increase financial resiliency because other people may be able to provide free or low-cost financial assistance (e.g., a no-interest loan or transportation), not to mention social and emotional support, during difficult times. A common example of financial support is caregiving services provided by adult children of aging parents.

Access Employer and Community Resources--Common employee benefits include health insurance, life insurance, child care, and tuition reimbursement. Another common employer resource is the match provided on a 401(k) plan. A 50-cent match for every dollar invested is equal to an automatic 50% return on your money. Community resources are just that: programs, services, and/or cash relief provided by government, non-profit human service agencies, community organizations, for-profit corporations, and other entities.

Make Prudent Investment Decisions--The best antidote for uncertainty is diversification. This means money spread across different asset classes such as stocks (e.g., growth mutual funds or company stock in a variety of industries), bonds (e.g., Treasury notes or municipal bond funds), cash (e.g., CDs or money market funds) and/or real estate (e.g., real estate investment trusts or rental property). Diversification works because it keeps some money invested for long-term capital growth while other funds provide income and/or liquidity for daily expenses. Asset classes also perform differently so diversification evens out the stock market's ups and downs. We know from history that investors need to be in the stock market over long time periods to reap its rewards. U.S. stocks have never lost value over any 20-year period.

Increase Personal Financial Literacy--Financial literacy is a resource for financial resiliency. Knowledge often is, indeed, power. For example, knowledge of investment principles can prevent costly errors such as panic selling during stock market downturns and market timing. Understanding of an employer's pension plan may result in a worker staying long enough to receive vested benefits. Appreciation of compound interest may provide motivation to make monthly deposits to a mutual fund and roll over lump sum pension distributions to another tax-deferred plan instead of spending the money and incurring tax penalties in the process.

Perform Periodic Self Assessments--Periodic financial check-ups are as important as a routine physical exam. A review of one's finances can evaluate progress toward goals, identify future action steps, and provide motivation to change behavior (e.g., increased savings) to improve financial resiliency. A helpful self-assessment tool, which also provides data for ongoing research about the frequency with which various financial practices are performed, is Rutgers Cooperative Extension's online Financial Fitness Quiz www.rce.rutgers.edu/money/ffquiz.