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Build your financial resilience

It’s important to look at your current financial picture. Would you be able to manage if you lost a paycheck or had an unexpected expense?
It’s important to look at your current financial picture. Would you be able to manage if you lost a paycheck or had an unexpected expense? Getty Images/iStockphoto

What would happen if you suddenly lost a paycheck or had to pay $500 for an unexpected car repair or urgent medical care?

For millions of Americans living paycheck to paycheck, the results would be an immediate financial crisis, as demonstrated by the partial federal government shutdown in January. Some civil service employees went to local food banks in order to feed their families. Others had to negotiate with their utility companies to avoid a shutoff of services or borrow from friends and family members.

A Federal Reserve report in 2018 found that 44 percent of Americans couldn’t cover a $400 emergency expense out of their pocket. That’s particularly troubling, since about 34 percent of U.S. households faced a major unexpected expense over the past year, according to a recent Bankrate survey.

In general, building your financial resilience involves setting a goal, looking at your options and taking a disciplined approach to putting money aside for the future. So, let’s say you want to save a $1,000 in the next year so you have at least a modest rainy-day fund. Once you are on that path, you can keep growing your savings until you have enough to cover about three to six months of your household expenses — an ideal target!

Increase your earnings: One of the ways to build a nest egg is to increase your earnings. That might mean asking your boss for a raise, selling unwanted possessions at a yard sale, or taking a second job.

In South Florida, there are many options for part-time work, such as working for a restaurant, supermarket or healthcare facility. If you are entrepreneurially oriented, you could generate income by becoming a driver for a ride-sharing service like Uber or Lyft. It’s an opportunity to take control of your their financial destiny without having to depend on an employer’s paycheck.

Cut your expenses: Another basic strategy is to cut your monthly expenses and put the difference into a savings account. Take a look at your household budget and see where you could cut back. While you probably can’t change your rent, mortgage or utility bills, you might be able to reduce spending on food or transportation.

If you drive to work or school, for example, you might be able to take public transit or car-pool with a friend or neighbor. If you go out to eat on a regular basis, you might be able to save money by cooking at home more frequently. If you can cut even $100 a month in expenses, you can start building your financial resilience.

You should also take a close look at your current loans and credit card balances. You may be paying more than you think in terms of fees and finance charges. The more you can pay down those debts, the more you can put into your rainy-day fund. But try to avoid using your credit card to meet an unexpected expense, unless that’s your only option.

Open a new account: As you begin a savings program, it’s a good idea to open a separate account just for this purpose. That will reduce the temptation to use those dollars for other purposes.

While virtually any bank will be glad to open a new savings account, talk with your current financial institution first. You might be able to reduce the fees or minimum balances on your current checking or debit account by adding savings as well.

While interest rates on savings accounts have moved up slightly in the past year, don’t worry about relatively small differences in rates. Instead, look for ways to make it easier to save each month, such as an automatic transfer from checking to savings. Then, you don’t have to remember to make a savings deposit every few weeks.

As your savings grow, you may want to consider opening a money market account or investing in a six-month or one-year certificate of deposit (CD). This can provide the foundation for a long-term investment plan, assuming that you already have a reasonable nest egg to meet financial emergencies.

In any case, it’s important to look at your current financial picture. Would you be able to manage if you lost a paycheck or had an unexpected expense? If the answer is no, then you should think about steps you can take to improve your financial resilience. As the old saying goes, “An ounce of prevention is better than a pound of cure.”

Andrew Menachem, CIMA®, is a wealth adviser at The Menachem Group at Morgan Stanley in Aventura. Views expressed are those of the author, not necessarily Morgan Stanley, and are not a solicitation to buy or sell any security. The strategies and/or investments referenced may not be suitable for all investors. Follow Menachem on Twitter @AMenachemMS.