Monthly Finance Message:

Developing Financial Resilience

October 2009

Barbara O'Neill, Ph.D., CFP®
Extension Specialist in Financial Resource Management
Rutgers Cooperative Extension

One of the most important small steps that someone can take to improve their personal finances and accumulate wealth over time is to increase their financial resilience. In tough economic times, financial resilience is more important than ever. What is financial resilience? It is the ability to cover the expense of life events, both negative (e.g., loss of a job) and positive (e.g., birth of a child), that impact one's income and/or assets or, in everyday language, to "roll with life's punches." Some financially stressful events, such as increased family size, unemployment, divorce, widowhood, disability, car breakdowns, and health problems, affect people individually. Others, such as layoffs, plant closings, corporate scandals, recessions, stock market downturns, and acts of terrorism, affect large groups of people or society as a whole.

What can people do to increase their financial resiliency? Below are four strategies that can increase financial resilience and help provide resources to cope with challenging life events:

Increase Emergency Reserves - A cash reserve (a.k.a., "emergency fund") is a key factor in financial resiliency and the best time to prepare for financial hardship is during more prosperous times. It may take a while, and a series of many small steps to get there, but financial experts generally recommend accumulating a "rainy day fund" equal to at least three to six months of living expenses, to get through periods of financial difficulty. Some financial commentators are recommending even more during the current recession (e.g., an eight-month fund is advised in Suze Orman's 2009 Action Plan) because it is taking people longer to find new jobs. Unfortunately, many Americans, do not have anywhere near a three-month emergency "fallback" fund. Start by saving $1 a day plus pocket change and ramping deposits up to as much as you can afford.

Maintain a Low Debt-To Income Ratio - Financial resiliency is increased when people live below their means and spend less than they earn, rather than live at the limit of their income. The consumer debt-to-income ratio measures one's ability to make current debt payments and is calculated by dividing monthly consumer debt payments (excluding a mortgage but including credit card payments, car loans, and home equity credit lines) by monthly take-home (net) pay. For example, $350 in consumer debt payments divided by a $2,500 net monthly income equals 0.14 or 14%. A safe debt-to-income ratio is considered to be 10% or less of one's monthly net income and a ratio of 11% to 15% implies reduced financial flexibility. When a household's debt-to-income ratio reaches 16% to 20%, it is considered fully extended and ratios of 20% or higher are considered an indicator of financial distress.

Purchase Adequate Insurance - Financial resiliency is enhanced with adequate insurance coverage that transfers the risk of negative life events to a third party payer (insurance company). Financial experts advise spending the bulk of your insurance premium dollars to protect against catastrophic losses that can wipe out your assets and/or claim future income for years to come (e.g., a court judgment), a strategy called "the large loss principle." Small expenses, such as a dented fender, can be covered through insurance deductibles or emergency fund savings. Adequate insurance should be purchased to protect against potential large dollar losses such as high medical bills, disability resulting in loss of income, liability, loss of a household earner's income, and the total destruction of one's home.

Develop Human Capital - Investments in human capital can increase financial resiliency by providing additional resources to cope with negative life events. Human capital is the process by which people invest in themselves and is one of the most important ways of saving. The most recognized way that people invest in human capital is through formal education that leads to a college degree, trade school certificate, or high school diploma. Other ways to develop human capital include on the job training and experiences, non-credit courses (e.g., to learn the latest computer software program), and self-employment or consulting work that broadens one's skill set and/or professional network. Another way of investing in human capital is by spending time (e.g., exercising) and money (e.g., eating nutritious food and getting periodic screening exams) maintaining one's health. The results are fewer days of sickness per year, a longer life expectancy, higher productivity both at home and at work, and lower health care expenses.


  1. Rutgers
  2. Executive Dean of Agriculture and Natural Resources
  3. School of Environmental and Biological Sciences