Table of Contents
6 Powerful Action Steps for Financial Resilience
Why is financial resilience important?
Because of times like this, COVID-19 wreaking havoc on all our lives. Personally my circumstances aren’t too bad because I’ve been fortunate enough to have been educated by a number of mentors in my life to be prepared for times like this.
The same is not the case for the millions of Australians who are lining up at the Centrelink Office. I really feel for them right now. I can only imagine the fear, anxiety uncertainty and possibly desperation that many are facing on a daily basis.
I have not come out of this without significant pain though. I was silly enough to have my Superannuation in ‘Aggressive’ throughout the Crisis and then I changed the allocation to Balanced right near the bottom of the crash. That means I lost a lot and then only recuperated some.
It hurts more to know that Warren Buffet’s rule of accumulating wealth is “never lose money”. Ouch!
Less learned. You really can never time the market.
So the question then is, how do we prepare ourselves and our families for the future so we don’t face a situation like this again where we need to rely on the Government for support in times of crisis and/or in my case make dumb decisions around our largest assets which cause us to lose out on a record 7% rise in a single day opportunity?
Well below is the strategy I have followed over the past 5 years, and it works rally well.
Each level is like a another level of fail safe in your financial net to protect during the down times.
Step 1: Set a Fail Floor
This is an easy first step, to build momentum with your first run on the board. This way you build confidence and start to build momentum.
What you want to do here is allocate $300 from your next pay to stay in your everyday (debit/chequing) account.
If your bank has a sweep function, set this so that there is always $300 in your everyday account.
This is your first step to financial resilience in times of uncertainty.
This ensures you always have cash available when you need it, and you have the certainty that there is always cash on your card.
Tip: Try to never go below the $300 fail floor, as this means you don’t keep relying on the sweep function to keep providing endless cash.
Step 2: Get a Rainy Reserve
The second step is slightly harder. However, this should be a cinch.
You’ve already built psychological muscles by setting up the implementation intention to never go below your fail floor of $300 in your everyday account!
You may also want to set up a sweep function, if your bank has this facility.
That is, to sweep cash into your everyday account from your savings account to make sure you never fall below a certain amount, i.e. below the $300 level.
The second step is to get $1,000 to $2,000 into your Rainy Reserve account. A rainy reserve account is a high interest saver account linked to your everyday account.
Personally, I’m set up with ING so that I have my Orange everyday account and I also have a linked high interest saver, this is my rainy reserve.
The rainy reserve needs to be a minimum of $1,000 and ideally $2,000.
The intention of this is for more frequent rainy days.
For example, like when the plumbing breaks on your house, or when someone breaks into your car and you need to put in for repairs etc.
Related Post: Here is a link to our podcast on setting up a rainy reserve quickly.
A rainy reserve shields us from the bigger and more frequent road bumps in life.
Step 3: Debt, Destroy!
The reason we left destroy debt to the third step is so that we can build up psychological momentum, with some easy early wins.
These small victories give you confidence and momentum on your FI journey.
This is not the most mathematically logical approach but when human emotion is factored in it certainly proven to be the most successful.
So how are you going to go about destroying your debt. Well there is a whole process for this which I go over in a related post, refer below.
But to cut the story short here, it is essentially not consolidating all the debts together. It goes like this.
Pay off the smallest debt first. Then the next smallest, then the next smallest etc.
Always you will be paying the minimum repayments on all debts but just focusing your extra cash on the next debt on your list.
This basically creates a snowball effect. As you have more and more cash available from knocking off your debts, you keep adding this additional available cash flow to the next debt until they are all paid off.
Once you have your fail floor, rainy reserve and debts paid off you have the foundations of financial resilience in place.
Now it is time to anchor that resilience by building an Emergency Fund.
Step 4: Net an Emergency Fund
The Emergency Fund is a critical element in anchoring financial resilience. An emergency fund is essentially 3 to 6 months of spare cash or cash equivalent asset available at short notice for big emergencies, such as:
- Forced into taking leave without pay due to a world crisis, e.g. COVID-19, or breakout of war.
- Falling sick for a number of months (often insurance only covers you for up to two years, but only after a three month waiting period).
- Losing your job – can have a devastating impact on an individuals or family’s finances.
Step 5: Set Automatic Investment Plan
You have now anchored your financial resilience and achieved the following:
- A $300 fail floor in your everyday account
- A $2,000 rainy reserve in your linked high interest savings account
- Become debt free using the debt destroyer method
- Set up a separate high interest savings account with 3 to 6 months of expenses.
So, now that you have a solid ground of financial and psychological certainty, you can begin to build your wealth for retirement. You can do this by setting aside money into a Freedom Fund.
The freedom fund is your goal to ultimate financial resilience, it is essentially the next step on the ladder, namely, financial independence.
And our recommended approach is to have 25 years’ worth of expenses saved and held in a low-cost index fund (i.e. outside of superannuation).
So, if you only spend $10,000 per year then you only need $250k saved up. If you spend $20,000 per year then you need $500k saved up.
If you spend $30,000 per year you need $750k and if you spend $40,000 per year you need $1,000,000 saved.
So how do you achieve this number? There are only four things you can do to achieve this:
- Decrease expenditure (see related post for ways to do this)
- Increase savings (see related post on how to do this)
- Increase income (see related post on ways to do this)
- Invest the difference wisely. We recommend investing in a low-cost index fund such as the VAS Vanguard Exchange Traded Fund (ETF) (see Related post: for more on index investing)
Step 6: Celebrate!
Once you reach your FI number the world is your oyster. You have the choice to do what you want, when you want, where you want and how you want.
You no longer need to trade your time and energy for money.
Your money has reached critical mass and is earning more than you spend, as long as you remain at the level of expenditure you saved for in your 25 x annual expenditure equation.
Summary - Massive Action Now
6 Powerful Action Steps to Financial Resilience:
- Set a Fail Floor
- Get a Rainy Reserve
- Debt, Destroy!
- Net and Emergency Fund
- Set an Automatic Investment Plan
And if you want coaching to help you reach these goals, feel free to reach out and schedule a 30 min free call, by clicking the ‘schedule a call’ button below.
Be the Outlier! Take action, get there faster!