An uncertain world requires financial resilience
Do you have a solid financial safety net to withstand unexpected events? From job loss to natural disasters, financial resilience is crucial in today's uncertain world. Yet, in my quest to understand money and finance, I discovered that financial resilience is an overlooked concept. Formal education fails to teach us the basics of managing money, leaving us dependent on fragmented sources of information and financial products that may not always serve our best interests.
I spent hundreds of hours learning about money
Over the last three years, I spent hundreds of hours learning about money, financial products, and emerging trends in this industry. I helped banks and fintechs build new value propositions, so my job was to understand customer needs and spot market opportunities.
Throughout this exploration, I interviewed many people about their relationship with money and finances. There are many findings that I could share, but in this article, I would like to focus on one crucial aspect I learned about: financial resilience.
What is financial resilience?
Financial resilience is our ability to withstand life events that negatively impact our income and assets. Those events could include job loss, an unexpected illness, extreme weather events, divorce or a pandemic. Resilience is not only about taking the hit but it’s coupled with the ability to "bounce back" from said events in a way that sets us up for success in the future, regardless of how adverse those events were.
All these situations can hit our wallets hard and make us more financially vulnerable. Consider this. Over the past few years, we faced sudden and unprecedented changes and challenges, which are likely to extend to the next few decades.
All this might mean that uncertainty and frequent disruptions will become a normal part of our daily lives. This is why having a solid financial safety net and a diversified asset portfolio is so important, as it can help give us a sense of control and some peace of mind.
Before discussing solutions such as emergency funds, sinking funds, and diversification, let's understand why financial resilience is little known and talked about.
Some of the many books I accumulated along the journey of exploration around money and finances.
Who teaches you financial resilience?
No formal education teaches you basic concepts about money and how to manage it. Therefore, what we learn about money depends on our family, friends, and career choices. Our real understanding of money is made even more challenging by the taboo of talking openly about finances, especially when we are seeking help or advice.
These informal teachings determine our knowledge, attitudes, and behaviours towards money. They can help us, but they may also hold us back. I remember one research participant telling me: "My mum would say: keep your money under the cushion". Advice that he would have followed, if it wasn’t for YouTube or TikTok.
These and other social platforms have made knowledge about money more accessible. However, many people I interviewed found the amount of information overwhelming, and those who engaged with it had a fragmented understanding of money and finance.
With a combination of in-depth knowledge of specific topics and big question marks on others, my interview participants struggled to identify which solutions would suit them best.
Financial institutions don’t make you financially resilient
Financial institutions can profit from our vulnerability to a certain degree. They don't want us to become insolvent, of course, but neither do they offer specific products or features that help us become financially resilient.
For example, overdrafts, payday loans, and high-interest credit cards are some of the most profitable products in this industry. Therefore, financial corporations are incentivised to sell high-margin products instead of risking their financial sustainability by pushing low-margin ones, such as savings accounts.
In addition, there are some more recent financial products that are make achieving financial resilience even harder. Take Buy Now, Pay Later (BNPL) companies such as Klarna.
These allow users to buy goods on credit and to pay for the purchase in multiple, usually interest-free, instalments over a few months. The problem with the BNPL model is that it offers instant gratification and removes the barriers that discourage users from buying what they might not be able to afford.
Another product trend to allegedly combat financial stress that is springing up like mushrooms is pay-check advance solutions. These allow employees to access part of their wages earlier in the month, without having to wait for payday.
Whilst potentially beneficial in the short term, when overused, these solutions may lead to higher fees and still don't improve our money management habits in the long run.
No wonder trust in financial institutions decreased considerably over the last few years. A 2020 study by Accenture shows that “29% of respondents trust their banks to look after their long-term financial well-being, compared with 43% two years ago”.
You think you are fine?
When it comes to our finances, most of us seem to be eternal optimists. While this is usually a positive trait in life, in this case it can prevent us from adequately preparing for the future.
Finances can feel overwhelming, and instead of taking action, we might end up procrastinating. We won't see the negative impacts of this behaviour right away. However, the cost of inaction might reveal itself when we experience unexpected expenses, or later on in our lives.
Financial resilience matters more than ever
Our finances have been hit by the pandemic, the rising cost of living, and the energy crisis. These events make it hard or even impossible to save for today or tomorrow.
A warming planet and its wide range of consequences will put us under even higher financial stress in the coming years and decades. Extreme weather events can damage our properties and belongings. Food is becoming more expensive, and our water and energy bills are skyrocketing.
It's not all doom and gloom, though. Necessity is the mother of invention, and we will create new ways to repair, exchange, and reuse to help our wallets.
Nevertheless, creating a financial cushion and learning to manage our money and potential risks will be more crucial than ever.
How you can become financially resilient
Here are some first steps towards becoming more financially resilient:
🚀 Start now. Not next week, not next month. Put a regular money date in your diary. Make time for money admin. You probably spend around 40h a week making money, so why wouldn't you want to spend 30 min managing it? YourJuno is the perfect companion to take you on this learning journey. The app is specifically designed for women and non-binary people, and it makes learning about money engaging and accessible.
💳 First things first. If you have high-interest debt (more than 10%, e.g. credit card debt or personal loans), pay back the minimum and create a plan to tackle it.
🗓 Put money aside at the beginning of the month. Don't transfer what is left to another account at the end of the month. There are different apps out there to help you automate your savings process. It's much more effective and saves you mental energy. Of all the apps I explored, Plum is one of my favourites. You set the rules and don't have to think about it anymore.
☔️ Build an emergency fund to cope with unexpected expenses. The usual rule of thumb is 3-6 months of your expenses. This article gives you a few more tips on how to calculate it.
⛑️ Get insurance. Assess what risks you are exposed to and find insurance that fits your needs. Prevention is usually cheaper than dealing with the consequences.
🤖 Set up sinking funds. This means regularly putting aside money for planned expenses, so you don't have any unpleasant surprises. Think about periodically saving for your holidays, car insurance, or tax bill. Here is a video that explains sinking funds in more detail.
This list is not professional financial advice but a collection of valuable resources that stood out to me over the past few months. There are additional ways to make you financially more resilient that I didn't include here.
If you are interested or just curious to learn more, please write “Full list” in the comments below or reach out to me. I will be happy to share and write more about this topic.
Financial products that build financial resilience
Next to building financial resilience for ourselves, we need financial services that help people overcome the barriers around money and prepare them for any potential financial shocks. Vulnerable customers are a risk to any financial business, so supporting them will become imperative.
Black Rock's Emergency Savings Initiative piloted Collective Emergency Savings for people with low-to-moderate income. People would save up for emergencies in small groups, which gave them more accountability.
As a result, they found that users saved more and more regularly, felt more prepared to manage an emergency, and believed they would be more financially secure in the future.
We need more products and services that address the need for financial resilience. If you are a financial institution or fintech looking for new ways to support your customers in building financial resilience, let's talk.
With my wealth of best practices, examples and years of experience, I’m sure I can help you.
