Crossroads Planning


Financial Resiliency: Is Your Financial Plan Tough Enough?

We all know that life doesn’t always go as planned and sometimes we are faced with tough economic times. With many Americans still reeling from the financial ramifications of the Covid-19 pandemic, it is more important than ever to think about how you will handle financial adversity.

Unfortunately, for many, the pandemic wasn’t the sole culprit of financial distress. 

In fact, a survey by TIAA found that 41% of Americans felt financially vulnerable ahead of the pandemic.

This statistic is especially worrisome when you consider that the average American carries $92,000 in debt and spends more than they earn. Moreover, the number of people living paycheck-to-paycheck has increased from 53% to 63% over the last year.

Fortunately, there are steps you can take to help shore up your finances and build up your financial resiliency. 

Prepare for the High Cost of Emergency Expenses

According to a study conducted by Bankrate, Americans are spending an average of $1,750 on unexpected costs every year. While that number may not seem like much, remember: it’s just one emergency expense for every person in your household — so if you have a family of four, you’re spending $7,000 in emergency costs every year. 

And that number doesn’t even include things like non-emergency health care and education expenses — both areas where we know Americans are struggling to put money away as it is.

This, of course, is why we don’t exactly align with a ‘certain-popular-personal-finance-guru’ when it comes to the amount that should be saved in an emergency fund — and instead recommend six months’ worth of expenses as a minimum.

The specific amount saved per month to accumulate that amount may vary depending on your income and expenses, but we do believe in some basic principles:

  • The emergency fund should be a savings account that’s separate from all other accounts.
  • This is not the place to save for big purchases or vacations — this money needs to be readily available when you need it most.
  • (*Most importantly) Don’t touch the money unless it is an actual emergency!

Aim to Boost Your Retirement Savings

The second step in building up your financial resiliency is to boost your retirement savings. Whether you are just starting out with a 401k or have been saving for decades, there is always room to increase the amount that’s going into an account every month.

The important thing here is not so much how much you save but also where you put those funds — and especially if your employer offers matching contributions. 

In fact, a recent poll found that only 56% of Americans are taking advantage of employer-sponsored retirement accounts. This is important because most employers will match the amount you save (typically up to around three percent).  

So if your employer matches $100 per month in contributions — and you aren’t maximizing this opportunity – then you are losing out on free money that could help supplement your retirement costs in the future. Additionally, when you combine those savings with an average 401(k) portfolio rate of return of 5-8% compounded annually and that leads to a significant amount in the long run.

Establish Long-Term Care Insurance

Conversations about financial resiliency usually revolve around two factors: assets and savings (which, not surprisingly, is why we chose to include them first in this post)

That said, a seldom mentioned aspect of financial resiliency is your insurance plan — specifically your long-term care. 

For example, long-term care (LTC) insurance can help you avoid the high costs associated with assisted living or in-home health aides — and even unpaid debt after it’s all said and done.   

The average cost for an assisted living facility ranges around $32k per year, so it’s easy to see how this can add up quickly.

Not only that, but LTC insurance is an important part of your financial resiliency plan in case you’re ever faced with a major illness or injury — and need help recovering from the unknown costs associated with such situations.    

Keep Your Job Skills Up to Date

The final factor in financial resiliency is your job skills. While it might seem obvious that you should always be looking for ways to increase marketable or transferrable skills, this step can often get pushed aside when we’re simply trying to make ends meet and pay our bills.   

But all of these factors are important because they can help you weather a tough economy.   

And the fact is that resiliency is more important now than ever before — especially when it comes to pandemic related issues like job security and healthcare expenses.    

For example, we’ve seen how quickly things change in this new economy with companies downsizing or going remote and hiring fewer people as a way to cut costs.   

How you deal with these changes will determine how financially resilient you are — and whether or not your savings can withstand any sudden drop in income.       

The good news is that there are many ways to build up this resiliency; after all, we’re talking about the ability to flexibly adapt to an ever-changing economy.   

In the end, we believe that financial resilience is about more than a solid savings account — it’s also about being able to adapt and handle whatever curveballs are thrown your way when life decides to test you.  

As always, thanks for reading! 

If you have any questions or comments, feel free to leave them in the comment section below.

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