Financial resilience is often confused with financial wellbeing. Knowing the difference can help you to deal with financial emergencies and not end up in a worse situation.
What is financial wellbeing?
Financial wellbeing is defined as feeling in control of your finances, both now and in the future. It is the generic view which most people use to assess their current financial situation.
Financial wellbeing is about being in control of your day-to-day finances and the relationship you have with money in the short term. Your everyday money habits will determine your financial wellbeing at a given time.
Being able to pay your bills, pay for the weekly food shop, put fuel in your car, and afford some luxuries each month may mean you have good financial wellbeing.
Being in control of your monthly expenses is a great first step when managing your money. However, it does not necessarily mean you can deal with financial emergencies when they arise.
What is financial resilience?
Financial resilience is your ability to withstand life events that impact your income or assets. It is the longer term approach to your relationship with money.
If an unexpected expense were to arise, having the financial means to deal with it means you are financially resilient.
Have a think how you would fund an expense equal to one month’s salary if you had to pay it tomorrow. Ideally, you would have emergency savings to fall back on.
If your emergency fund is not enough, knowing your options to borrow money and having a good credit score may still mean you are financially resilient, as you can still deal with the expense.
What might test your financial resilience?
Any unexpected expense can test your financial resilience. Some of the most common things are unexpected health issues, job loss, and divorce.
If you or a loved one suddenly became ill, you may be out of work and lose income. There may also be extra expenses related to healthcare. How would you cover the cost?
Losing your job means losing your income. You will still have to deal with many of the same expenses, so consider if you have enough savings to cope until you find a new job.
Getting divorced may mean starting from scratch financially. Do you have enough savings to get back on your feet, and is your credit profile in a good position to apply for credit?
These are the main reasons, but any unexpected expense can test your resilience. Anything from your boiler breaking to your car needing urgent repairs.
If any of these scenarios happened to you, where would you get the money from to deal with it?
Financial resilience vs financial wellbeing
It is entirely possible for you to have good financial wellbeing but poor financial resilience at the same time. You might be able to meet your expenses every month, but if an unexpected expense arose you may not be able to deal with it financially.
This is why financial resilience is so important. Being financially resilient means you have the options to deal with unexpected expenses.
Having an emergency fund can cover a lot of unexpected expenses. Having a good credit score means you are likely to access low rates when borrowing.
As a result, you can avoid high-interest credit such as payday lenders, which can leave you in a worse situation and threaten your day-to-day financial wellbeing.
Build your financial resilience today
The best way to become more financially resilient is to save regularly and build your emergency fund.
At Serve and Protect, we make it easy to save with repayments straight from your pay. Get started today by opening an easy access account.
- The information provided is for guidance and educational purposes only. Serve and Protect CU does not offer regulated financial advice. Please seek independent financial advice.
