Building financial resilience

Financially, it feels like the hits keep coming right now. Building resilience is key to quickly recover from setbacks. While financial setbacks are inevitable these five tips will help grow and sustain your wealth for a life well lived

1. Expect the unexpected

Rarely do we get advance warning that something bad is about to happen, so the time to develop your resilience strategy is now. We can anticipate events that would throw our finances into disarray. Things like a house burning down or a car being stolen, not being able to work due to illness or injury, or at the end of the spectrum the death of a breadwinner or caregiver.

With an idea of the type of threat we face we may be able to insure against some of them. If you have taken out any type of insurance policy you’ve already made a start on your resilience plan.

2. Create buffers

While you can’t insure against every possibility, you can build financial buffers. This might simply be a savings account that you earmark as your emergency fund that you contribute to each payday. If your home loan offers a redraw facility you can also create a buffer by getting ahead on your mortgage repayments by even the smallest amount.

Buffers can be particularly important for retirees drawing a pension from their super fund. Redeeming growth assets for cash in order to make pension payments during a market downturn can lead to a depletion of capital and reduction in how long the money will last. By maintaining a cash buffer it can give time for the market to recover.

3. Cut costs

The internet abounds with tips on how to cut costs and save money. In difficult economic times cost cutting can help you maintain your financial buffers and important insurances.

Key to cost cutting is tracking your income and expenditure and you guessed it, that means doing a budget. Read our recent article on getting your budget back into surplus here.

There are also a lot of great FREE tools available at moneysmart.gov.au including information on budgeting apps.

4. Invest in quality

There are many companies out there that have long track records of consistently pumping out profits and dividends. They may not be as exciting as the latest techno stocks but when markets get the jitters these blue-chip companies are more likely to maintain their value than the newcomers.

This is important. The more volatile a portfolio the more likely an investor is to sell down into a declining market. This turns paper losses into real ones, depriving the investor the opportunity to ride the market back up again.

The other key tool in creating resilient portfolios is diversification. Buying a range of investments both within and across the major asset classes is a fundamental strategy for managing portfolio volatility.

With a well-diversified portfolio of quality assets there is less need to regularly buy and sell individual investments. Unnecessary trading can create ‘tax drag’ where the realisation of even a marginal capital gain triggers a capital gains tax event and consequent reduction in portfolio value.

5. Take advice

Building financial resilience can be a complicated process requiring an understanding of a range of issues that need to be balanced against one another and prioritised. Your financial planner is ideally placed to assist you in developing your own, personalised plan for financial resilience. Contact the Magnify Wealth team today to plan ahead.