How to Be Financially Resilient

The worst way to invest is by acting on emotions. When unexpected changes occur in the economy, most people tend to panic.

Financial resilience isn’t about avoiding all those bad things that can happen to you (for example, a pandemic, or getting laid off) because, inevitably, those things will happen. Instead, financial resilience is about being able to deal with those things when they do happen. In this post, we’ll detail how to build up your financial resilience.

 

What People Do When the Unexpected Happens

There’s three reactions that humans have when something happens that they aren’t mentally prepared for:

  1. Most people will freeze and do nothing.
  2. About 10-15% of the population will do exactly the opposite of what they should do. They don’t remain calm, they panic.
  3. Another 10-15% of the population will do exactly what they should do. Maybe because they’ve been trained to deal with the situation or have thought about it before, so they aren’t as surprised.

Mental preparation is a large part of being financially resilient. It will increase your likelihood of making the right decision when surprise or tragedy strikes.

You cannot prepare yourself in a crisis effectively, you must be prepared before the crisis.

 

Trying to Predict the Future isn’t Helpful

Many economists and money managers will try to tell you what’s going to happen in the future. The reality is no one knows what’s going to happen. Acting on outcome-based thinking, meaning trying to predict what will happen, isn’t productive. It’s more helpful, and constructive, to have a scenario-based thinking mindset, and prepare for all the situations that could feasibly happen, not only the few that you, or experts, believe are most likely to happen.

For example, it is very likely that taxes are going to go up in the future, but we don’t know exactly what that will look like, or how it will affect each individual person. An outcome-based thinker might predict the worst, panic, and sell many of their assets to avoid paying taxes. These tax changes may be years down the road, and that person just missed out on many gains to be had.

 

So, What Can You Do?

While it’s pointless to try and predict the future, we recognize that there are certain trends and events that are more likely to happen than not. The more you can build those scenarios into your ‘business plan for life’ the more resilience you build up to be able to handle those inevitable changes.

Make sure to have an agile mindset. Be prepared to not know the outcome of situations, be okay with recognizing when you’re wrong, and be prepared to adapt to change. A fixed-mindset will not get you far in the financial world. This doesn’t mean you can’t be confident in your decisions; it just means you have to be flexible and adaptable at the same time.

                Retirement Planning

When it comes to saving for retirement through investing, you have a few options.

  1. Buy and hold and hope to market continues to go up. The worst-case scenario here is that the market goes down right before you retire, and you don’t have time to build your nest egg back up.
  2. Be a bit more agile and try to time the market correctly, buying and selling at exactly the right time. However, this is difficult for anyone to do, especially those with full-time jobs that don’t have time to focus all their time and energy on the stock market.
  3. Adopt a more tactical perspective and manage the risk based on math and probability. You can work with a financial advisor that will help you make money when the markets go up and cap your losses when the markets go down.

Managing the risk can look something like this: saving more for retirement than you think you’ll need, mentally preparing to retire later than you want to, and building tax-deferred or tax-free income options for retirement.

 

How to Find a Great Money Manager

Finding a great money manager or financial advisor can take time. We recommend doing all the research you can and partnering with one that has historically done well in up AND down markets. A good financial advisor will be flexible to the rapidly changing markets, able to admit when they’re wrong, and able to continually make corrections.

A great financial advisor is essential to have because they can hold you accountable to not panic buying or selling when bad things happen. They can help you build financial resilience so your retirement and estate planning needs are taken care of.

 

Give us a call at 614-389-9711 to speak with a financial advisor today.


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