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CySEC INVESTOR GUIDE
How to enhance your financial resilience
WHAT IS FINANCIAL RESILIENCE?
Financial resilience is a very important aspect of personal finance. It refers to the ability to bounce back if something unfortunate happens to you financially.
In other words, it can be described as your ability to adapt and adjust to potential changes that impact your income, such as a major unanticipated household expense, a sudden job loss and during uncertain economic periods.
Achieving financial resilience is the best safety net to counterbalance financial difficulties and reduce vulnerability, especially when things take an unexpected turn.
Some financially stressful events, such as unemployment, divorce, disability, and health problems affect people individually. Others, such as recessions, stock market downturns, and acts of terrorism, affect society as a whole and are generally more difficult to anticipate or plan for.
Nevertheless, when households do not have enough financial resilience to withstand financial pressures and emergencies, such as the aforementioned, they can end up turning to bad credit and unbearable debt.
To help individuals and households improve their ability to meet ends, we have gathered the following ten steps to boost one’s financial resilience:
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HAVE A FINANCIAL PLAN
Having a plan is key to building your financial resilience. Set goals on what you want to achieve, stay focused on important matters and prepare for events that may shake your financial stability.
An annual financial plan can help you make better use of your money, ensuring that you live comfortably, and within your means, are able to deal with any sudden expenses, and you generally are on the right path to achieve your long-term financial goals, including securing a decent income in retirement.
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UNDERSTAND WHERE YOUR MONEY GOES
Take control over your financial position by understanding how savings and debt affect your financial resilience.
In order to make educated decisions about how you are going to make ends meet, you must start by identifying how much you earn and analysing how you spend your money.
In addition to your household, clothing and grocery bills, make sure you include irregular bills that you only pay a few times a year (like car and house insurance, and renewal of road license) and any cash you are spending daily for transportation, business lunches, morning coffee, cigarettes, etc..
Consider monitoring your sources of income and your expenses for a month or so to help you see where your money is going. Next, you must try to create a budget that you can live with, to ensure your expenses do not systematically outweigh your income.
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DIFFERENTIATE NEEDS AND WANTS
Always ask yourself whether your purchases are necessary. Look for any expenditures that you do not need. Not all your purchases are necessities. Many people end up spending the bulk of their money on wants instead of needs. Identify your spending. Find a way to eliminate or reduce costly expenditures.
For example, if you always spend money on expensive coffee every day, try to make your own coffee at home instead, or save by reducing the frequency you take coffee from fancy cafes from every day to once a week.
In general, create a personal budget to plan your inflows and outflows. Once you distinguish between your essential expenses and the expenses you incur for things you want; then cut what you can from the non-essentials and explore ways to reduce costs of essential expenses.
A budget will help you to have enough money for the things you really need. This may help to keep you out of debt or keep your debt at a minimum, increasing your prospects of surviving during your financial crisis.
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REDUCE OR ELIMINATE YOUR PERSONAL DEBT
Owning your assets (house, car) increases your security as you don’t need to worry about losing them if your income is reduced. However, as reducing your personal debt will certainly take some time, a good place to start is to try to pay off or decrease the debt with the higher interest rate. In general, pay off your debt as soon as you can.
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INCREASE YOUR FINANCIAL KNOWLEDGE
In other words, increase your knowledge of financial topics so that you make smart financial decisions.
The world of finance can feel confusing and full of jargon but improving your financial literacy level will make you feel more confident and be better equipped when making important decisions about your personal finances. And, with a solid base of financial knowledge, you’ll be better able to anticipate and navigate any tricky territory.
Personal finances can be a daunting experience for people without sufficient basic financial education. According to recent surveys, those who were not taught in school about funds, investment, savings, taxes, and other basic economic terms -which is most of us- have a greater chance of becoming adults who might often find themselves in financial dead-end. The best way to avoid this is by acquiring a solid financial knowledge. It’s never too late to learn and the outcomes will be rewarding for your financial wellness. Check out more on this at the CySEC dedicated financial education website here.
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CREATE AN ADEQUATE EMERGENCY FUND
Make sure you maintain an adequate emergency fund of at least three month’s expenses. Having an available budget is key to deal with life’s unexpected challenges and economic down turns. Make sure your emergency fund is liquid in cash equivalents such as a bank savings account, which can be accessed without delay.
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INSURANCE COVERAGE IS A MUST
Consider purchasing adequate life insurance in order to protect dependents against the sudden loss of a breadwinner’s income, as well as health and disability insurance to provide continued income following an accident or illness.
Health insurance can help support you and replace lost income if you develop an unexpected illness and are unable to work. Another product on the market is life insurance which pays out in the event of your death, providing your dependants with vital financial support at an incredibly difficult time.
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PROTECT YOURSELF FROM FRAUD
Learn to recognise the red flags of online or other financial fraud to shield yourself from being scammed. This way many fraudulent offers can be identified and prevented before they can cause any damage. The warning signs may include promises for unusually high returns, offers that sound too good to be true, pressure on you to act "right away”, or a requirement of an upfront investment. Learn more about the ways to spot and protect yourself from a financial scam at the CySEC dedicated financial education website here.
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PLAN FOR A STRESS-FREE RETIREMENT
Older people often say that the best aspects of retirement include the ability to pursue hobbies and interests, be able to afford any health bills or unexpected expenses, and to travel and spend time with family and grandchildren. However, to be able to afford these things, all of us need to do everything possible to secure a decent future for ourselves and our loved ones.
One should first determine their needs and options and the level of well-being that is most comfortable for them and then choose the systems and methods for ensuring it. This may mean participation in an individual or group private pension plan, which will enhance the government-mandated pension benefits. In general, the sooner you develop your personal pension plan, the easier it will be for you to implement it.
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MAKE YOUR MONEY GROW
Investing any idle capital you may have, can give your money a goal and a way to grow it. The best way to invest depends on your current and future financial circumstances. It's important to have a good and detailed understanding of your incomes and expenditure, your assets and liabilities, as well as your responsibilities and goals when building a sound investment plan. Also, investments begin with determining your financial goals, investment timeframe and feelings about risk. There are many investment options out there and the best investments for your needs can change according to how your unique financial situation evolves over time. That means investment options that may be appropriate for you today, may not be so over time.
If you do decide to invest, it is important to do so, with an investment services provider that is licensed and regulated by the relevant supervisory authority. All the entities licensed and supervised by the Cyprus Securities and Exchange Commission can be found here.
In conclusion, financial resilience depends very much on one’s own financial behaviour. It needs to be cultivated every day, over a long period, not to wait and start once the crisis hits. Emergency funds and the right insurance policies provide a financial cushion and protection when dealing with an unexpected crisis. Prioritise your needs and wants. Take control of your spending. Above all, make sure you avoid activities that can increase your financial vulnerability level.
The sooner you adopt a good financial behaviour, or the earlier in life, the better chance you have to weather financial misfortune.
What is more, developing and sustaining robust finances will give you a sense of security and peace of mind, allowing you to go about your life with confidence, without worrying about the future.
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