Financial resilience is the ability to cope with unexpected circumstances that put pressure on your finances. Not everything is predictable in life, so it’s important to build your financial resilience where possible. By having things like an emergency fund or specialist insurance, you could better prepare for events such as accidents, job losses or ill health that might otherwise lead to financial insecurity.
It can be challenging – 51% of people we surveyed couldn’t live on their emergency savings for more than 3 months.1 Here we look at some of the things that could affect your finances and how you could prepare for them by improving your financial resilience. Some of these are practical solutions, but others are to do with your money mindset. This article isn’t financial advice.
Why is it important to be financially resilient?
Financial resilience is important when we navigate unexpected challenges. It's like a safety net that offers peace of mind and the freedom to pursue our goals. In today's unpredictable world, building and maintaining it is necessary to ensure a stable future for ourselves and our loved ones.
Life events that can negatively impact your finances
Challenges are an inevitable part of life, and building financial resilience is about preparing for the unexpected. And yet, 24% of UK adults – or 12.9 million of us – have low financial resilience.2 In this section, we look more closely at the kind of common events that could cause financial hardship.
Job loss
There are many reasons why people lose their jobs, especially during turbulent periods in the economy. Sometimes you’ll have time to prepare, but often you have to deal with the shock of it while trying to figure out your next steps.
Health issues
Good health is a universal goal, but it’s not always possible. Sometimes you need time to recover, and that can prevent you from working at the same capacity.
Accidents
Like health issues, accidents can come out of the blue and affect your earning potential, whether temporarily or permanently. Depending on the circumstances, it could also increase the financial burden on your household, for example if you had to adapt your home to improve accessibility.
Caregiving
It’s not just your own health that could affect your income – caring for a loved one could also take you out of your work at unexpected times. Things are particularly tough for those in the ‘sandwich generation’, who have to care for their children as well as their elders.
Divorce
Divorce rates are increasing.3 It’s not just the heartache you have to deal with – separating your finances can be expensive, and there could also be tax implications that could have a longer-term impact on your finances.
Financial mismanagement
Most of us probably have some type of debt – a mortgage, on credit cards, or debt collected as a student – and that’s ok. But it’s easy for debt to accumulate if you don’t keep on top of your finances by sticking to a budget and paying off what you owe, especially if there’s a high interest rate attached to any loans you take out.
How to build your financial resilience
There are a number of ways to improve your financial resilience. Not all of these will suit your needs or circumstances, but they could be a good place to start. Talking to a financial adviser could be a good way to find solutions more tailored to your circumstances. You can find one near you by visiting MoneyHelper. A financial adviser is likely to charge for their service and should provide details of their charges upfront.
1. Build an emergency fund
It can take an average of 6.1 weeks for a company to fill a vacant position.4 From the job hunter’s perspective, it’s an even longer process between landing a job and getting your first pay cheque.
Given that 26% of people are only able to live off their savings for less than a month if they lost their job, having an emergency fund that can cover extended periods of unemployment can be crucial to financial resilience.1 This is typically three months’ worth of expenses, and it should include outgoings like mortgage or rent and bills. This money can also come in handy if you unexpectedly need to take unpaid time off work or have a temporary cash flow issue. Read our guide on how to build an emergency fund to see how you can start your own.
2. Diversify your sources of income
If you’re self-employed, having multiple sources of income could improve your financial resilience. It means that if one client cuts down on the work they offer you, you might have another one to fall back on. It’s a bit trickier when you’re in full-time employment, but even then, it’s possible to improve your hire ability by keeping up with industry trends, networking and continuously upskilling. Make sure you check your contract with your employer before taking on extra work, to avoid breaching any regulations that could impact your main job and understand any tax implications.
3. Be careful about taking on debt
Student loans and mortgages can be essential for building up your wealth. But if you’re using other loans or credit cards to fund your lifestyle – and are struggling to pay it off on your regular salary – it might be a sign that you’re living beyond your means. Debts like these can be particularly problematic as interest rates are often high, meaning it’s easy for things to spiral out of control.
Creating a budget and sticking to it could be important here. If the situation becomes overwhelming, don’t be embarrassed to turn to a debt advisor who could offer advice and help find solutions to suit your needs. For more information on paying down debt, read our article Should you prioritise saving or paying down debt?
4. Consider insurance
There are lots of insurance products out there that could serve as a safety net when something unexpected happens. Health insurance could help you get treatment faster, while life insurance will pay out in the unfortunate event that the person insured dies. However, it might also be worth considering income protection insurance for when you can’t work temporarily or permanently, and critical illness cover such as cancer and strokes. If you’re the sole breadwinner in your household, it could be an even more important consideration.
5. Think long-term
One in four children born in the UK today can expect to live to almost 100.5 Given this, a sensible lifetime financial plan should aim to provide a century of support. And yet, 63% of today’s 55–64-year-olds have saved less than £100,000 in their long-term savings.1 This is unlikely to be enough for them to maintain the lifestyle they want.
So when you’re planning your finances, it’s important to think about what brings you joy and purpose now and in the future. This is where talking to a financial adviser could be valuable. They can assess your situation and your preferences to develop a tailored plan for you, whether that’s savings, pensions or investments. They may also be able to advise you on the tax breaks, benefits and personal allowances that could help you make the most of your income and savings.
Improving our ability to bounce back
In life, the unexpected is to be expected. There are many events that could impact us financially. While it’s not always possible to predict them, you could lessen their impact by improving your financial resilience. There’s more than one way to do this and it’s important to choose the right option, or combination of options, to suit you. Even taking a small step towards better financial resilience could help, and the best time to build on yours is now.
1 How you can improve your financial wellbeing, page 9, 11 and 14. Data Source, Aegon’s Centre for Behavioural Research, July and August 2023, 10,040 UK residents.
2 Financial Lives 2022 survey. Data source, Financial Conduct Authority, July 2023.
3 Divorces in England and Wales: 2021. Data source, ONS, November 2022.
4 Hiring Trends Index: a look at the recruitment landscape of Q3 2023. Data source, Totaljobs, October 2023.
5 Life expectancy calculator. Data source, Office for National Statistics, January 2022.