In praise of financial resilience

I had lunch with my friend Craig a few months ago. Craig is an architect, and he took me on a tour of his company's offices. “The cool thing about this building,” he told me, “is that it's especially resilient.” I could tell from the way he said it that the word resilient meant something a little different than what I might expect.

“What do you mean?” I asked.

Craig explained. “In architecture, resilience refers to a structure's ability to return to its original state after a disturbance. Say strong winds cause a skyscraper to sway or an earthquake shakes a house. If they're resilient, those buildings move with the outside forces but then return to normal when things calm down.”

“Ah,” I said. “When I talk about personal finance, I preach resilience.”

“Sure,” he said. “Resilience is a good thing, both in buildings and in people.”

Ten years ago, when I was still struggling with money, my finances were not resilient. I had no savings, and I was living paycheck to paycheck on $50,000 a year. When even small things went wrong, such as car trouble, I found myself in crisis mode. How would I pay to fix the problem? How could I meet my other financial responsibilities?

When I began to turn things around, one of my first actions was to set aside a small ($500) emergency fund to cope with the unexpected. This idea — promoted by Dave Ramsey and many others — built some resilience into my budget, allowing me to cope with minor crises.

As time passed and my financial situation flourished, my ability to bounce back from unexpected blows improved. This was partly because having more money gave me more options. But it was also partly because I adopted an internal locus of control, accepting responsibility for the things that happened to me in life. Instead of waiting for someone or something else to fix problems, I decided that I would fix them myself.

The National Economy vs. Your Personal Economy
Over the past five years, I've come to hate the phrase “in this economy.” After the market crash in 2008, the mass media seemed to adopt the notion that we're weathering an economic storm that simply will not stop. Even today — despite the fact that most economic indicators are positive — there are tons of articles built on the premise that the average person is being buffeted by forces beyond her control.

I disagree.

Besides, even when the national economy is bad, that doesn't mean your personal economy has to suffer. For a few years now, I've been sharing a metaphor I've come to love.

It's as if each of us is the captain of a ship sailing on the ocean. Sometimes the elements are favorable. Sometimes the seas are stormy. Yes, we can choose to surrender to the whims of the weather, but a smart captain does what he can to prepare for bad weather so that he can steer his ship safely to harbor. In short, the national economy does affect your personal economy, but you can't control the former while the latter is entirely in your hands.

To make your financial ship resilient, you must adhere to certain fundamentals, such as:

  • Maintaining an adequate emergency fund.
  • Limiting your use of debt.
  • Practicing thrift.
  • Investing for the future.

To paraphrase a famous philosopher, a resilient person is in the world but not of the world. You cannot escape the national economy. You cannot escape the mass media. You cannot escape your friends and family. But that doesn't mean you have to buy into what everyone else is doing. Most people have fragile personal economies that crumble when times get tough. You want yours to be flexible and adaptable.

Mind Over Money
It's also important to remember the psychological side of money management. Many of my financial tenets are based on the need for financial resilience.

    • When I say that it's important to spend less than you earn, that's because a positive cash flow allows you greater flexibility to respond to life situations. If you're deficit spending, it can be tough to find the funds you need to cope with a crisis — especially if you have no savings. But if you have a “profit” at the end of each month, you have the ability to redirect some of the money temporarily to take care of business.

 

    • I argue that the perfect is the enemy of the good because when you're obsessed with finding ideal answers, you set yourself up for frustration when you realize there usually isn't an ideal solution. Plus, perfection also produces procrastination and resistance, two natural enemies of resilience.

 

    • Another aspect of resilience is the ability to respond to failure. Failure is okay. What matters isn't the mistake, but how you respond to the mistake. Successful people brush failure aside and continue marching toward their goal. (This is almost the definition of resilience!)

 

  • And, of course, there's the motto of this site: Do what works for you. Each of us is different. We have different goals, personalities, and experiences. We each need to find the tools and techniques that are effective for our own situations. There's no one right way to save, invest, pay off debt, or buy a house. When you buy into the idea that there's just one right answer, you're subscribing to a fragile mindset. Resilient people are open to the idea of multiple paths to success.

In psychology, adaptability refers to how well a person can adjust herself to changed circumstances. Because we live in a constantly changing universe, your ability and willingness to adapt is a barometer that measures both your ability to thrive and your capacity for happiness.

In personal finance, adaptability and resilience are also barometers for ongoing success.

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FrugalSage
FrugalSage

This is something i’ve been thinking about recently. I totally agree about an emergency fund providing resilience. But it goes beyond that, as it’s actually access to capital of any kind provides a certain measure of resilience. Car broke down? No emergency fund? But you have a CC? Great no problem. Now don’t get me wrong I am definitely not saying that you should have no emergency fund, nor am i singing the praises of using debt. Using CC’s like this is a temporary ‘shock absorbing’ sort of resilience that shouldn’t be used in an ongoing matter. But it is… Read more »

FI Pilgrim
FI Pilgrim

I would argue that this is exactly the mindset that gets so many people stuck in a “minimum monthly payment” spiral.

If you can’t save $1000 for emergencies when things are going well, what makes you think you can save enough to pay off that same $1000 when you’re paying high interest rates on a credit card?

It’s the habit of saving that has to change in order to be “resilient”, whether that’s before or after the emergency. If you can change it before the emergency then it takes a lot of the stress out of life.

Vanessa
Vanessa

I understand what you’re saying, but I also understand what FrugalSage is saying. It would be great if emergencies would postpone themselves until we’re financially able to deal with them, but life doesn’t work that way. And in the meantime you have to make the best decision you can with the resources you have access to in order to survive.

I’m not in debt now but I have been in the past and I’m much better off for it. But I only did it after weighing all other options and using debt in ways that made my life better.

Jon
Jon

I use a strategy that does both – incorporates having “emergency fund” savings with using a credit card for instant access to cash to cover true emergencies. When my truck broke down in the middle of nowhere, I didn’t have access to an ATM – I needed to use my Visa to pay the tow truck driver. Doesn’t mean I’m irresponsible; I pay the Visa bill in full every month. I never put things on the Visa I don’t have cash on hand to pay for, and I get various other benefits for using the card.

Frugal Sage
Frugal Sage

“I would argue that this is exactly the mindset that gets so many people stuck in a “minimum monthly payment” spiral.” I do not disagree with you. Our views are not mutually exclusive. Although, you are talking more about preparing prior too, and then coping with events after an emergency. I tried adding enough caveats to my point to try and avoid this sort of automatic reaction to anything debt related. I am not saying that you should only ever use debt as your emergency fund. I am just saying that access to funds – of any kind – adds… Read more »

PB
PB

I agree that CCs can help in the short term. This past summer, we had two unexpected expenses: major car repairs (took it in for one thing, found three others) and my daughter’s wedding (the one who said her whole life that she was never getting married). These events went through both the emergency fund and the catastrophe fund (and it was NOT an extravagant wedding)and wound up partly on the credit card. I decided how long I was willing to have anything on the card (6 months), divided the debt up, and will be out from under in January.… Read more »

Sarah
Sarah

Frugal Sage’s comment is important, and a concept that too often in the world of personal finance is railed against, and I have to admit I am having a hard time learning to live in peace with the thought of my emergency fund being on credit…but right now we have a home equity loan for a land project. We paid off out of pocket 110,000 of the project. $40,000 is on the equity line. For me there was no sense keeping $25,000 in an emergency fund when I’m paying 3% interest, so I put the emergency fund to paying off… Read more »

MelodyO
MelodyO

We have the same emergency plan, and I think it’s a fine one as long as interest rates stay low. And honestly, if you’re good with your money overall it seems like a pretty solid bet that if you did use your LoC, you’d pay it off ASAP and be back on track in no time.

Phoebe@allyouneedisenough

I love this article! I have written about a similar topic, but instead of saying I have resiliency, I said I was insulated. I too was living paycheck to paycheck (actually not even, more like credit card to credit card) just a few years ago, and it really struck me how far we’d come when the first “financial cliff” started being discussed and it didn’t even phase me. In the past I would have been biting my nails worried that I would go down if the carefully balanced plates I was spinning got disturbed at all, but now it will… Read more »

Adam Hagerman
Adam Hagerman

“Even when the national economy is bad, that doesn’t mean your personal economy has to suffer.”

I love that sentence!

Every day I have people continuing to blame the national economy for their own personal financial downfalls. When they continue to tell themselves that “hey, it’s not my fault”, their finances remain unchanged as they are waiting for something else to change. The problem is, when the national economy does change, their personal situation will still most likely be the same. Then, they find someone or something else to blame.

Thanks for the quote. I’ll be using it daily now!

BD
BD

What about those of us who have always been frugal, have always saved what little money we have, but have been unable to find work? This economy IS bad, and for those us who are jobless, getting a job has been near-impossible. It’s easy to talk about how the economy isn’t all that bad when you’re employed, but for the unemployed, this is a nightmare. (And yes, I’ve been doing everything I can to get employed).

Adam Hagerman
Adam Hagerman

My apologies BD. I guess I should have elaborated a little bit about who my clients are. I work at a large enterprise in which all of the clients I see are employed. Even though they are employed, several still blame the national economy for their financial woes. It’s upsetting for me to hear because there are millions out there just like you struggling to find employment. Have you read the book “What Color Is Your Parachute” by Richard Bolles? I utilized a lot of the information in that book to land the job I have now. I think there… Read more »

Matt Becker
Matt Becker

Resiliency is absolutely one of the most important parts of a good financial plan. It’s the reason why I believe so strongly in having good insurance coupled with cash reserves. The cash reserves help you handle the smaller stuff and the insurance makes sure you’re not devastated by the big stuff. Having that security actually gives you more freedom to take risk in other areas of your life that really matter to you. To me, that’s invaluable.

Brian@ Debt Discipline
[email protected] Debt Discipline

Totally agree! Keeping your personal finances in order at all times give you a lot of flexibility, one example that comes to mind is buying investment properties at great deals when the national economy is bad to build further wealth. You don’t want to have to rely on someone else inability to manage finances to affect your way of live.

Curtis@PayOffMyRentals

Nice post! We often have far more control over our personal finances than we care to admit. I like to think of it as a moat. The wider and deeper the better. The four items lending to greater resiliency are excellent: -Maintaining an adequate emergency fund. -Limiting your use of debt. -Practicing thrift. -Investing for the future. I’ve just spent all of 2013 paying off a rental house. I just wrote a celebratory post about it. It widens and deepens my protective moat because I now have $425.00 less in monthly debt obligations and $425.00 more in income. Two more… Read more »

Matt
Matt

Great article, like with houses and buildings financial resilience is a series of foundational elements that work together. Its interesting to observe the strengh of your own financial resilience without panicking like most people do.

Unfortunately this financial resilience is quite dependent on good financial literacy which I believe is generally lacking in our society. I didn`t learn much about my personal finances in school and my parents didn`t know enough thus I struggled for the early part of my adult life. This is a great reminder of the basics.

Anne
Anne

I don’t mean to be unkind, but I hear a lot of people complaining about not being financially literate and so they got into trouble. I have to respectfully disagree *somewhat*. You don’t have to have read any finance books to realize that one needs money behind you for a rainy day.

I feel that falls under common sense.

El Nerdo
El Nerdo

Hi Anne, What you say makes perfect good sense, having money aside for a rainy day is only logical, but I find it’s quite “uncommon sense” nowadays. I think I’m the only person I know in real life that has an emergency fund. The “common sense” I see all around me is to borrow money when you need it. Young people, old people, It’s what I see them do. Call it brainwash or indoctrination or something else, but the norm is to spend all you have, and when you hit a bump just put it on credit– from fancy rewards… Read more »

Adam Hagerman
Adam Hagerman

Well said El Nerdo!

Being a financial coach, I see this way too often.

Like you said, there’s this mentality of “well, everyone is in the same boat as me so I might as well enjoy myself”. Getting people to alter that way of thinking is one of the toughest things I do.

Anne
Anne

Yeah, I get you’re telling about the common “perception” of financial life, perhaps among the majority of people. But I wouldn’t call it “common sense.” But semantics aside, there have always been people who just realized that rainy days and broken cars will come into their lives and they prepared for them as best they could. Since the very beginning of time there were people who put away some of their acorns and those who didn’t. We all know both sorts. My objection is saying that those who are careful for the future are those who read financial literacy books.… Read more »

Jacq
Jacq

Even if you don’t have financial resilience, you can build it in times where many are having difficulty. (Not that I’d wish that on anyone but it sometimes happens.) My grandparents made a good part of their stash in the 1930’s Great Depression. I had my by far best earning year in 2008-9 winding down a company going through CCAA due to the financial crisis and working a second job at the same time. Plowed all of that cash into the market and then some and had a killer year in the 2009 stock market. Sometimes resilience can just be… Read more »

Anne
Anne

J.D., one of your best posts ever. Clear, straight forward and tells it like it is.

Love the word “resilience”.

Matt YLBody
Matt YLBody

I wouldn’t say there are a lot of positive indicators about this economy…

The printing press keeps running artificially inflating the stock market while making the value of the dollar even more worthless.

The middle class are having difficulty buying homes as any affordable homes are being bought in cash by wealthy and/or foreign investors.

The cost of living continues to rise while wages stay stagnant. In fact, people are bringing home less money now than they were several years ago.

There are troubling times ahead…

Ramblin' Ma'am
Ramblin' Ma'am

I agree. The market looks good, and sure, I’m happy that my 401(k) is doing well, but a lot of that is due to the Fed’s stimulus. Many jobs have not been replaced. Many full-time jobs have been replaced by part-time jobs. A lot of people have simply left the labor force.

It seems that the performance of the stock market has less and less to do with the economic reality for most Americans.

However, I do think JD’s larger point is correct. We shouldn’t be defeatist about our personal finances because of the larger economy.

El Nerdo
El Nerdo

Hi Matt–

here some upsides to your downsides

weak dollar: good for exports

the house thing: foreign investors are showing confidence in america; their investments stabilize homeowners equity and keep neighborhoods safe.

cost of living vs. wages: good chance to trim the fat!

troubling times ahead: nobody can predict the future– not even experts who are great at interpreting the past. but if it’s true the sky will fall, then now it’s a good time to build resilience.

Carla
Carla

Many people don’t have much “fat” to trim.

El Nerdo
El Nerdo

Hi Carla– I grew up in a poor country, so here in the US I can see oodles of money everywhere– like those interminable interstate highways or the expensive traffic lights everywhere or the speedy supermarket checkouts. I remember when I first came here some guy complained to me that his family was poor and he suffered because they had an old car. And old car! A Cuban would give an arm for one of those (I’m not Cuban, but you should see what they can do with old cars.) And then people say that eating at McDonalds is “cheap”… Read more »

Carla
Carla

Hi El Nerdo – You definitely have two extremes from your life experience to compare. I don’t live on $7,000 a year (it would honestly depress me to no end), but my income on SSDI and my part-time job combined is pretty low. With that said, I do live a better life than a lot of people in my situation. I don’t have kids, don’t spend money on items I don’t need, I don’t travel – even to visit family, don’t vacation, rarely take a day off from work (which is not good for my health actually). No bars, no… Read more »

imelda
imelda

Um, really poor people do not have computers and air conditioning, at least where I come from (NYC). That’s exactly why, for example, our public libraries are so crowded in the summers.

My mom teaches at a low-income public school, and a huge number of her kids do not have computers or internet at home.

Cable TV, that I won’t argue. It’s pretty much an accepted basic need in this country; I don’t know why.

Carla
Carla

@imelda – I don’t know about the current age of digital cable, but back in the day many poor people I knew that had cable lived on stolen cable and bootlegged videos. They weren’t buying it.

El Nerdo
El Nerdo

Imelda– I am related to and neighbor to a lot of “rural poor” and they have trucks and cars, cellphones, xboxes, satellite tv, etc.

Compare vs. the rural poor in, say, Bolivia.

Erman
Erman

I also grew up outside the U.S. and I am going to have to agree with El Nerdo. Even the poorest of the poor in U.S. is in relatively better shape than the poor people in most part of the world. Forget about cable TV or AC. We are talking about millions of people where 3-4 families share a hut, they do not have access to ‘luxuries’ such as clean water, a toilet, a bathroom or furniture and they eat the same cheapest possible meal 3 times a day.

Carla
Carla

I like the idea that there are multiple paths to success. Far too long I got stuck in the mindset that I needed to have follow a formula to be successful financially (and other aspects of life) and therefore I am doomed because I didn’t follow that for reasons within and beyond my control. Thankfully, eventually, I learned there are more than one ways to skin a cat. The other aspect of my continued downfall was due to my belief that no matter what, I,/b> will always be a failure, so why try? I took more than financial literacy books… Read more »

Carla
Carla

Eeek! Didn’t mean to bold everything.

Amanda @ Passionately Simple Life
Amanda @ Passionately Simple Life

Love the idea of resilience, being able to get back to your natural state after some event. I really believe that is why we need to have an emergency fund all throughout life. But most people don’t want to believe that the good weather will have to give way to rain sometimes.

Great article!

El Nerdo
El Nerdo

Over the past five years, I’ve come to hate the phrase “in this economy.”

Oh man!– me too. It’s like saying “let’s start this conversation by hypnotizing ourselves into feeling powerless.”

Lately I’ve been just retorting with phrases like: “WHAT economy?” or “What is this economy you’re talking about?”. That usually snaps them out of their slumber.

I hate it when people put their minds in autopilot.

And great article. Thanks.

Ramblin' Ma'am
Ramblin' Ma'am

JD, while I don’t share your optimism about the economy (see my comment #21 above), I do agree with your larger point. I know a lot of people don’t like Suze Orman–I like her take on the psychology of spending, but wouldn’t turn to her for investment advice. She said something last year that I thought was really smart. I’m paraphrasing, but it’s something like, “People think the American dream is a single family house in the suburbs. Actually, the American dream should be, ‘What will enable me to sleep at night, no matter what is going on in the… Read more »

Lindsey @ Cents
Lindsey @ Cents

I love this post. These reminders help me keep perspective with my own financial mistakes – and there were plenty! All I can do is take responsibility and move forward with a plan for the future and better money habits.

Whatnut228
Whatnut228

Great point about the “bad economy” effect your personal economy. I would suggest that the media and government want you to believe this so that they can sell you on the idea that we need more government for the solution.

Chuckie G.
Chuckie G.

“When you buy into the idea that there’s just one right answer, you’re subscribing to a fragile mindset. Resilient people are open to the idea of multiple paths to success.” I think this is what I enjoy about GRS. This is what makes GRS unique. Lack of this is why I walk away turned off from MMM and the like. JD – a couple of months or so you were talking about how you were perplexed as to why some people balked at MMM’s statements/teaching. I’ve thought about this myself as I tend to agree with a lot of what… Read more »

Big-D
Big-D

I think this is an issue that is much larger than simply looking at it the way you did JD. It is all about Locus of Control. If you are an indivdual who believes that everything around you is beyond yoru control, and spend your entire life just going between experiences/issues/drama then you have an external locus of control. If you believe you can plan for things, and want to control as many things as you can so things are not unexpected, then you have a high internal locus of control. The people who say things like “In this economy”… Read more »

Sarabeth
Sarabeth

The unemployment rate is currently 7.8%, which is still high by historic standards. For those who are employed, real wages have stagnated for the past decade (despite record corporate profits). The minimum wage is at its lowest rate (in real dollars) in many many decades. Yes, individuals should do what they can to promote resilience. But ignoring the structural forces that work against the efforts of many Americans to achieve financial stability is frankly insulting. It also promotes a political agenda that favors the interests of the owners of large corporations over those of most working Americans.

El Nerdo
El Nerdo

Yes, individuals should do what they can to promote resilience. But ignoring the structural forces that work against the efforts of many Americans to achieve financial stability is frankly insulting. I would love to agree with this but I can’t anymore. I used to hope that politicians would fix things for the rest of us but the cure isn’t coming– not soon enough for anyone to keep waiting. My friends who insist in complaining about the state of things are all broke and in debt. Of course nobody should ignore the structural forces you mention. They are out of the… Read more »

imelda
imelda

“I would love to agree with this but I can’t anymore. I used to hope that politicians would fix things for the rest of us but the cure isn’t coming— not soon enough for anyone to keep waiting.” Gah! Gah! Of course the cure isn’t going to come if we all accept this mentality! Gah! Keep complaining! Get angry! Speak up! Jeez! ETA: This mentality, to me, is like saying we should all focus on what we can do to save the environment (recycle, take short showers, etc.), which is all wasted energy as long as our industries are spewing… Read more »

El Nerdo
El Nerdo

But Imelda, I’ve done all that and much more, and have nothing to show for it except for a collection of disappointments. I’ve picketed capitols, lobbied legislators, I’ve canvassed and donated, I’ve roused rabbles, I’ve collected signatures and signed petitions, I’ve marched on cities. Play that game if you like, but I’m done with it, at least in the economic arena. Now I’m doing like Candide and I’m cultivating my own garden. Help isn’t coming. I’m not waiting any longer. Re: the environment– vote with your dollars. Don’t buy from the spewers. In a consumer society, industry will provide what… Read more »

imelda
imelda

“Vote with your dollars” is the same as “take shorter showers.” Individual action is not going to do a damned thing without group involvement.

I sympathize, very much, with your jaded feelings about the hopelessness of change. All I can do is tell myself that real change takes time – sometimes even generations. Like suffrage, or civil rights. Incremental progress is still progress.

Whatnut228
Whatnut228

I’ll keep taking shorter showers, growing a few of my own vegetables, and living below my means.
And when I and other people who live a frugal lifestyle to save a few bucks for comfortable retirement you can say we were lucky or more fortunate.

Beth
Beth

“Sure, after the end of World War II the US was the only developed country that hadn’t been reduced to ashes,”

I was nodding along with you, but you lost some credibility here! 🙁

I’m not trying to be snarky here, but maybe you’d be interested in learning more about Canada?

El Nerdo
El Nerdo

Ha ha– oww! Sorry, I’ve got the ‘Merican myopia. Yes. I’ve been to Canada and I love it. Nova Scotia in summer is incredible. Maybe I should have said “the only major power” instead of “the only developed country”– there was after all Switzerland that survived WW2 intact and with all that loot, and I’m sure someone else can mention other places. But yea, no disrespect meant, eh?

Beth
Beth

lol! I’m glad you didn’t read sarcasm into my comment. I’d be curious to hear your thoughts about the Canadian economy sometime, actually. Americans tend to have a very different view of their country than the rest of the world has of the U.S. I wonder to what extent the same is true for Canada.

But I digress 😉

Anne
Anne

“Hopefully ‘America’ is not the name of a Chinese town.”

Best line I’ve heard in a long time. May I please borrow it?

imelda
imelda

I think that home ownership is – should be – a key part of resiliency. Once you own your home outright it frees you from the number 1 concern of working stiffs, how to keep a roof over your head.

Micro
Micro

Reading your description of nation economy vs personal economy reminds me of something I read that brought up a similar idea with inflation. Just because the nation inflation measurement goes up x% doesn’t mean your personal spending also has to. You can find ways to keep your costs down so that your personal inflation rate is lower. This will also really come in handy when you are trying to make your money last through retirement. If the cost of beef skyrockets, turn to chicken or turkey. Or you can always mix the beef with cheap fillers like liver, rice, etc… Read more »

Beth
Beth

I don’t think it’s quite so simple — if more people start eating chicken, then won’t chicken become more expensive (supply and demand)? 😉

I think we have a better shot at saving money when we go against the grain so to speak. I agree with you that we have to look at our own spending and find ways to cut costs rather than focussing on a number which may or may not represent what’s happening with our budget.

Trace @ Independence Investor
Trace @ Independence Investor

I’m also a strong believer in “Do What Works for You”. The pay yourself first strategy has worked well for me over the years. I’ve never been the type of person who budgets every dollar. I am however careful with the big ticket items.

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