Financial Resilience – The Hard Way versus The “Easy” Way

Almost every financially resilient person I’ve met went through a traumatic personal or financial event before becoming financially resilient. It was either the loss of someone that provided, or a drastic change in financial conditions: bankruptcy, job loss and alike. This traumatic event ignited a series of changes, of behavior alterations that eventually led not only to a more stable income, but, in many cases, to a state of “being rich”.

I call this “the hard way to financial resilience”. I’ve been there. It wasn’t nice.

There’s also an easy way, though. You don’t have to go through a horrible bankruptcy, or through the mess of losing a well paid job, to start the process. You can start even if you’re doing moderately well.

As a matter of fact, if you’re doing moderately well, you should start right now, because you’re already very well positioned.

I see three major areas of life that needs to be amended if you go the “easy way”: spending (reducing elasticity), saving (focus on the habit, not necessarily on the amount) and investing (which may take many, many forms).

Reducing Elasticity Of Spending

If you’re in a relatively stable point of your financial life, you’re probably enjoying enough peace of mind to go over the budget in any given month without too much trouble. You know you can put it back next month. I call this “a high elasticity of spending”. If you want to become financially resilient, though, you need to reduce that.

Spending more than you allocated for the current budget window should be completely prohibited. If you have a monthly budget (I do hope you have a monthly budget) then don’t go over it. Maintain the expenses at a constant level, despite “opportunities” (which can be entertainment opportunities, like travel, or investment opportunities, like assets on sale at a very tempting price). Having a fixed budget dedicated to these “opportunities” may help. If there are no “opportunities” in a given month, than carry it over the next one.

Reducing the elasticity of spending should be observed especially when there are increases in revenue. It’s not compulsory to spend more if you make more, you know? Every raise you get, or every sudden cash windfall should be allocated very conservatively in your budget, avoiding spikes.

The Habit Of Saving

The second most important behavioral pattern is saving. Like I said, it doesn’t matter how much you save, as much as if you save every time you get some income. Creating this habit is paramount, but also boring.

Saving is not spectacular, because it doesn’t have an immediate effect. At most, there are some numbers going up in some spreadsheet cells and that’s it. But these numbers can save your life (or at least maintain your stress levels at a bearable level) when the shit hits the fan. Decoupling yourself from the emotion you get when you part ways with money (being it pleasure or distress) will help here. Just don’t think about it, put that money in the savings account and forget about it.

Saving means paying your future self when no one else could pay you.

Money That Can Create More Money

The third area that needs to be worked on for financial resilience is investing. There are entire libraries filled with books on investment strategies, so I’m not going there. Instead, I will use a very simplified definition of investment: it’s money that can create more money. The difference between investing and saving is that saving it’s supposed to stay the same, while investing is supposed to go up.

Savings is static, risk averse, and investing is dynamic and risk prone. You need both types of money to create financial resilience. You should judge, of course, the level of risk you’re comfortable with at every investment. But the bottom line is that this type of money is different from saving. If it’s not generating more money, it should either be considered saving, or should be reallocated to other assets that are indeed generating money ASAP.

Luckily, we live in times when investing is as easy at clicking on some buttons – after you spend dozens of hours of research, that is. But the actual operation is simple. Way easier than it used to be even 20 years ago. If you do your research well, you can start investing with just as little as a few hundreds dollars. But then again, doing it without research is useless.

Altering these three behaviors can be done with a relatively low cost. You can still maintain a decent lifestyle even if you reduce your elasticity of spending, the habit of savings will create in time a very useful financial cushion, and the money that you put to work by themselves will slowly start to add some extra layer to the cake.

All this without having to go through a financially traumatic event. Believe me, I’ve been there and it wasn’t nice.

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