Financial Resilience is the key to success!
Some people take failure in their stride, they just bounce back stronger and better than before while others, find it difficult to get back up. The difference between these people is mental toughness and resilience. Financial resilience applies this concept of bouncing back from tough situations to your finances.
Recently, a few people I know faced difficulties due to the economic downturn. They were under severe stress both professionally and personally as they had not prepared adequately for a downturn. This got me to thinking about what are the characteristics needed to survive a situation like the current economic downturn.
What is financial resilience
The best swords in the world are made from Toledo steel and they are both strong and flexible. Just as a sword is hammered, heated and cooled to temper and make it stronger, our mind and finances also need to be tempered till they become both strong and flexible.
Mental toughness and the ability to bounce back in tough times characterizes resilience. The ability of your finances to keep you afloat during crisis is financial resilience. These issues could be larger world wide issues like Corona Virus, the Ukraine War or personal problems like loss of job.
What financial resilience is not
Being resilient does not mean never having to face difficulties in life. It just means that you are better prepared both mentally and financially to deal with various situations.
Resiliency is not a genetic trait that cannot be learned. We can cultivate mental toughness and resiliency. In fact, I think it is inbuilt into the human psyche. Just look at all the people moving on with their lives after largescale disasters. In the same way we can plan for eventualities and become more financially resilient.
Kabir survives the Recession (a short story)
Kabir was in trouble. His manager had just informed him that due to the recent economic downturn, the company had decided to cut salaries by 15%. He was relieved that the company was not laying him off but, was worried about how to meet his expenses. He called his friend and financial mentor Guru, to discuss the issue and see if he could find a solution.
Kabir told Guru the bad news and asked Guru what he could do. Guru instead, asked him what he planned to do about the situation and Kabir had to think hard about his finances. Guru asked Kabir if he had created an emergency fund as he had suggested earlier. Kabir dejectedly said yes but, told Guru that he didn’t want to use it up. He mentioned that as they had discussed previously, Kabir had maintained a 10% surplus every month to contribute to his emergency fund. Guru asked him about other sources of funds and Kabir told him that he couldn’t sell his stocks as the stock market was currently down and he would be at a loss. If they could wait for 6 months it would probably start recovering.
Guru said, “Kabir you have done a good job building in Financial Resilience into your plan. If not, you would have been in trouble.” Guru then suggested another alternative. He said, remember you mentioned that you had cleared some of your housing loan. You could call the bank and tell them your situation and ask for a reduction in the monthly EMI payments by 10% with a corresponding increase in term (duration) to compensate. Between the surplus and the monthly payment reduction, you will be able to maintain your monthly expenses easily.
Kabir was happy that his discipline and planning had helped him survive what could have been a disaster. He wouldn’t have to resort to lifestyle changes for now.
How to become financially resilient
One key aspect to resilience is to be able to learn and adapt. Fortunately, resilience can be learnt and developed through practice, discipline and hard work. In the financial world there are many events that test our resilience like the loss of a job, a stock market crash or a bad investment.
Did you know that most large Governments have various disaster scenarios thought out before hand and have a plan to deal with it? You need to make a similar plan by forecasting some of the possible issues which can affect your finances like illness, loss of job, economic downturn, loss in stocks etc.
Learn to deploy flexibility! Following a rigid plan will get you stressed out and cause higher chances of overall failure of plan from just one instance as you go into a downward mental spiral. While finance is about the money, a lot of the will and decisions come from your mind,
We have no control of events in our life, how we choose to react defines us.
Turner (2017) detailed the four important traits of mental toughness, which he called the 4C’s: Control, Commitment, Challenge, and Confidence. The key to success is to possess sufficient amount of these four qualities in combination.
I have adapted the 4 C model of mental resilience for financial resilience. The 4 C’s to follow are: control, commitment, challenge and confidence.
Control
This is the extent to which you feel in control of your finances. Avoid investing with emotion. A few steps to increase your control of finances are:
- Have a financial plan and set goals
- When investing run the numbers and don’t be emotional
- Track spending
Commitment
Commitment shows how focused and reliable you are in your financial planning and execution. It means setting and achieving your goals. It means working hard for a long time and not changing pans on a whim. A few ways to make sure you are committed to your financial success are
- Reduce or eliminate debt
- Cut unwanted costs
- Increase net worth
Together Control & Commitment represent the quality of your resilience. Knowing that you are in control and the ability to focus as well as make changes allow you to bounce back successfully
Challenge
Challenge shows how determined and adaptable you are. When you master this step, you begin to see adversities and change as opportunities to adapt and succeed. Treat failure as a way to learn from your mistakes and incorporate this learning into your strategy. To be able to face challenges you must
- Be adaptable
- Have some flexibility built into your plan
- Have emergency funds to preserve your gains
- Don’t sweat the small stuff.
Confidence
Confidence is the belief you have in yourself and your ability to be capable. This is the main ingredient which inspires others and keeps you steady when the times are tough. To increase your confidence,
- Connect with others and learn with a team
- Learn perspective
- Be uncomfortable and explore new learning and areas
- Learn gratitude & hope
Together Challenge & Confidence represent your toughness in face of adversity. When you are confident in yourself and your abilities, you connect well with others. As a result, you can find opportunities in difficult situations.
When I first found the 4 C’s, I realized that I have been working towards building financial resilience for a long time without realizing it! These concepts have pulled me through some tough times and I sincerely hope they do the same for you.
Here are a few good articles on mental toughness and resilience:
