A young woman lost in the Land of Oz asks how to get back to Kansas. “If I were you,” she is unhelpfully told, “I wouldn’t start from Oz.” But if Oz is where you are, you have no choice; from there is where you must start.
That is how it is with many financial hardships. We must start where we are, in the thick of it.
A Beautiful Example of Resilience
After battling stomach cancer at the age of 72, the artist Henri Matisse was confined to a wheelchair. This made it difficult to paint or sculpt. But his passion for making art was undeterred. So, Matisse cultivated a new artistic medium: paper cut-outs. By cutting out shapes and forming collages, he created a late-stage body of work that is as celebrated as his early paintings.
Matisse’s artistic reorientation was an act of creative resilience. The kind of resilience that’s becoming more of a necessity in our financial lives. Research from the National Endowment for Financial Education (opens in new tab) shows that 96% of Americans experience four or more income shocks — a health crisis, job loss or other life transition — during their working years.
Often people face these shocks from less-than-ideal starting points. Most Americans say they would have trouble paying for a $1,000 emergency expense (opens in new tab).
What Is Financial Resilience?
I like to think of financial resilience as the ability to overcome a financial hardship and still make the best of life. It is more art than science, because each person’s situation is different. But we all proceed from the thick of it.
And conditions seem to be getting thicker. For one, life expectancy is rising (opens in new tab), which means younger generations will need to save for a longer retirement than previous ones. Another downside of living longer is the chances are greater for experiencing unfortunate events.
Simply starting to save for retirement is a challenge for most young adults, who typically enter the workforce saddled with more than $30,000 in student loan debt (opens in new tab).
Meanwhile, many people who grew up in the post-war years, when a degree was expected to translate to a good-paying job, a yearly vacation, some college savings for the 2.5 kids, and a comfortable pension or retirement fund, are finding that isn’t always so.
A survey from Allianz Life (opens in new tab) found that half of Americans are forced out of the workforce earlier than they planned. The leading reason was unanticipated job loss, something experienced by around 900,000 Americans between the ages of 60-69 as a result of the pandemic, according to the Bureau of Labor Statistics. An unexpected exit from the workplace can mean missing out on additional years of peak earnings, potentially lower retirement benefits and the need to start drawing down assets early.
How You Can Become Financially Resilient
It is important to conceptualize your finances in concrete terms: how much to save in a 401(k), what type of investments to buy (opens in new tab), when to file for Social Security, etc. But it is also important to think abstractly, because it is difficult to account for adversity — a pandemic, a cancer diagnosis, the automation of your job.
Although our financial pictures are all different, the elements of financial resilience can be crafted along the lines of a paint-by-numbers kit:
1. An emergency fund of three to six months’ worth of expenses.
The entire purpose of this money is to alleviate the pain of an unanticipated financial hit.
2. Insurance coverage — health, home, auto, life.
Sure, it’s not as sexy as gaining triple-digit investment returns, but insurance will likely save your neck more than the market will. Take time to understand what your policies cover, and compare coverage by more than just the price.
3. A decent sized nest egg.
The appropriate amount varies based on your desired lifestyle (opens in new tab). But for someone who makes less than $100,000, it’s a good idea to save around seven to 10 times your salary by the age of 65 (opens in new tab). Retirement savings are not only to help fulfill your goals or dreams, but also to preserve your lifestyle as your age and health leaves you more vulnerable to financial shocks.
4. Updated job skills.
Skills help us earn better pay and keep us in the game. A Brookings report (opens in new tab) estimates approximately 25% of U.S. jobs will be highly impacted by automation in the coming decades. So, it is worthwhile to learn a new skill or take an educational workshop every couple years.
5. Some kind of financial planning.
Seems obvious, right? Unfortunately, many of us for myriad reasons are simply winging it (opens in new tab). A plan won’t prevent adversity. But financially speaking, when you have a full awareness of your situation — your cash flow, bank account balances, etc. — you are better able to adapt.
As with Matisse, resiliency is finding a new angle. It is creating a new path so you can keep moving when the world around you, as if a whirlwind, suddenly changes.
Or, in the wise words of the 13th century Persian poet Rumi: “As you start to walk on the way, the way appears.”
Jacob Schroeder is the Manager of Investor Education at Advance Capital Management (www.acadviser.com/ (opens in new tab)). He is also the creator of the personal finance newsletter The Root of All (https://rootofall.substack.com/ (opens in new tab)), exploring how money shapes our lives. His goal is to help people make more informed financial decisions and live happier lives. His writing has been featured in publications such as Yahoo Finance, Wealth Management magazine, The Detroit News and, as a short-story writer, in various literary journals.
How to pick the best robo advisor for you
Kiplinger's guide to the best robo advisors to fit your needs.
By Kim Clark • Published
Stock Market Today: Microsoft Earnings Weigh on Stocks
While Microsoft reported top- and bottom-line beats in its fiscal Q2, shares declined on disappointing guidance.
By Karee Venema • Published
Want to Increase Income? Focusing on 5 Elements Can Help
There are multiple ways to generate income, but to make your money work for you, consider sustainability, maximizing, automation, reinvestment and tax efficiency.
By Jamie P. Hopkins, Esq., CFP, RICP • Published
Are Annuities Good Investments? Weighing the Pros and Cons
Love ’em or loathe ’em, annuities can be a smart investment tool for the right person under the right circumstances.
By Nate Miller, Investment Adviser Representative • Published
6 Questions Your Financial Adviser Should be Asking
To effectively help you with your retirement strategy, a retirement professional must get a clear picture of what you have and what you need.
By Tyler Hill, Investment Adviser Representative • Published
Financial Planning Should Be Intergenerational
Overcoming the unspoken rule that money is too taboo a topic to discuss among family members is important going forward. The reality is that families, at some point, will need to be on the same page about wealth planning.
By Aditi Javeri Gokhale • Published
In Retirement Planning, What’s Your Retirement Personality?
There are many ways to think about retirement planning, and your personality can influence yours. If your personality and plan match, you have a greater chance of retirement success.
By Samuel V. Gaeta, CFP® • Published
Inflation’s Toll: Cuts to Retirement Savings and Health Care
Many consumers struggling to make ends meet amid inflation are reducing retirement planning and health care, both of which can have disastrous results later in life. A professional could help.
By Kristi Martin Rodriguez • Published
Considering a Roth IRA Conversion? 6 Reasons It Makes Sense
Avoiding possibly higher taxes in retirement, having no RMDs and the markets being lower are just three reasons to switch to a Roth IRA.
By Kevin Webb, CFP® • Published
Am I Going to Be OK in Retirement? Yes, With Focus on 5 Key Areas
All it takes is protecting what you save, having an income plan, knowing your health care options, reducing your tax burden and making an estate plan.
By John Goodhue • Published