Building Financial Resilience: How to Prepare for (Almost) Anything
September 18, 2017
By Carlos Garcia, CEO/Founder of Finhabits

We all know we should save more money.

 

Advice like “Pay yourself first” and “Save for a rainy day” has been around for generations.

 

And we’ll all face unexpected financial stress at some point, whether it’s caused by a natural disaster, economic downturn or job loss—or happier events like a new baby or new business. Most of us will also retire at some point, and health issues may speed up our planned timetable. When we have some money set aside, we can be more proactive than reactive and bounce back from setbacks more easily.

 

Yet nearly 6 in 10 Americans don’t have enough savings to cover a $500 or $1,000 unplanned expense, according to Bankrate. And according to the National Institute on Retirement Security, roughly 45 percent of working-age households have no retirement savings at all. Among minorities, the situation is even more dire: 74 of Latino families and 59 percent of African-American families don’t have a retirement account, according to the Economic Policy Institute.

 

So why don’t more of us save for our future? We haven’t learned to make it a habit.

 

Think of savings in terms of habits, not goals

We tend to think of saving for emergencies and investing for retirement as big, lofty goals we’ll tackle someday. But successful saving requires habits—acquired behavior patterns we follow regularly until they become almost automatic. Saving simply won’t happen until we move from setting goals to developing habits. You can think of it in terms of weight loss: to meet your goal of dropping 10 pounds, you have to develop habits like tracking your calories and walking before work.

 

How do you start the savings habit?

The good news is that there are now many online tools, such as the platform we’ve developed at Finhabits, that can help you automate savings and investing. But you still need to take the first action. Here are some of the most important habits for building financial resilience, along with the small steps you can take today to make them part of your life.

 

Develop these habits today to prepare for tomorrow

 

Habit #1: Build an emergency fund

Having a “safety net” can help you pay for emergencies, such as a broken sewer pipe or a broken arm, without resorting to costly, high-interest credit cards or loans. It can also give you the confidence to make big decisions, like switching careers or taking a riskier job.

How to start: Add up your basic monthly expenses, such as rent, food, and utilities. Your ultimate goal should be to save 3-6 times this amount, but don’t let this total intimidate you from starting. For now, choose an amount you know you can save each month—say $50—and set up an automatic, monthly transfer from your checking account to another account that’s not tied to your debit card.

 

Habit #2: Invest in a retirement account

Many of us were taught how to work hard, but not how to save or invest for retirement. Growing up in El Paso, Texas, my family members just assumed we’d take care of one another in old age. I love that we’re there for each other emotionally, but what if we can’t provide for each other financially? Investing ensures we’ll be able to help ourselves and each other.

How to start: If your employer doesn’t offer a retirement plan, you can still open one on your own. At Finhabits, we make it easy to get started in just a few minutes. We create a customized plan based on your needs, and you can start by contributing as little as $5 a week. We’ll stick with you every step of the way to maximize your savings habit, offering advice for how to maximize your savings.

 

Habit #3: Pay off high-interest debt

Debt is one of the biggest hurdles to wealth creation. If you carry a $5,000 balance on a credit card with 18% interest, in a year you’ll add $900 to your debt pile. And when you owe money to creditors, it can be hard to find an extra $100 for your emergency fund or retirement account.

How to start: Use any windfalls, such as your tax refund, bonus or overtime check, to pay down your credit card balance. Then take a hard look at your expenses and identify areas where you can trim—maybe $70 a month by cutting cable or $20 by bringing your lunch to work. Arrange to have that money automatically paid toward your credit card bill instead.

 

Habit #4: Increase your savings rates regularly

Once you feel like your savings habit is well established—say, after a few months or even a year—it’s time to challenge yourself and find ways to increase your contributions. You’ll want to do this regularly to ensure your savings rate is keeping pace with your needs.

How to start: You can schedule a review date on your calendar when you start saving, or if you use Finhabits you can review your account at any time on your smartphone. Consider increasing your retirement contribution by 1 percent of your annual salary—$500 a year if you make $50,000. Think about ways you could push your savings even further, such as putting half of your upcoming raise toward retirement. And if you’ve paid off your debt, take the monthly amount you were paying toward your credit card and add it to your monthly retirement contribution.

 

Regardless of where you are in your financial journey, don’t let the perfect be the enemy of the good. Start small, but start today. Taking care of your future self will be a habit before you know it.

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