One of the four financial health influencers is the volatility of income and expenses. Households impacted by such volatility find it difficult to achieve financial well-being. Increased expenses or reduced income often dictate tough lifestyle choices and increase stress levels beyond chronic. When there is increased income or reduced expenses, there is a less problematic increase in household discretionary funds and the fun that goes with it. Seasonal workers, those on fixed incomes, or subject to inconsistent hourly work schedules are especially vulnerable to this type of volatility. These financial shocks can have a devastating effect.
Income and expense volatility does not have to impede your pursuit of 6 Financially Healthy Behaviors. Volatility can be mitigated by preparing for it. John F. Kennedy once said, “The time to repair the roof is when the sun is shining.” Don’t wait for it to rain before you prepare.
One cause of volatility is “stuff happens.” Happens to everybody. No one is immune. To achieve financial well-being you need to possess the “capacity to absorb financial shocks.” Financial shocks often self-inflicted can come from external sources too. Geopolitical, weather or cyberattack events can disrupt the economy and your household. It is important to be able to manage and recover from the inevitable financial shocks.
Every household should have a disaster recovery plan. The foundation of a financial recovery plan is the Emergency Fund, the "liquidity buffer" between you and ruin. Building an emergency fund is your #1 priority no matter your age. You should well establish an emergency fund before you divert resources to a debt reduction strategy.
Emergency funds are highly individualized. Sufficiency depends on a variety of factors including your health, your age, your temperament, dependents, housing situation, the stability of your job, your risk tolerance, and more. Just be mindful of the truism, "It’s better to have money and not need it; than to need it and not have it." Your emergency fund can’t be too big. Its size may determine how it is stored but not its existence.
4 Ways to Jumpstart an Emergency Fund
Being able to deal with income and expense volatility successfully requires preparation. The base of that preparation is an emergency fund. Start or grow yours now.
Financial shocks are inevitable during a lifetime. “Stuff happens” according to the PG-rated version of that cliche. When it does my language is more NC-17. Nevertheless, happens it does. The most common financial shocks for working-class families are:
What is an emergency fund? It is a "liquidity buffer" between you and ruin. If you have very little saved — say $200 to $500 — each additional dollar you set aside dramatically reduces your likelihood of falling into financial hardship. It can be any of these items. Some are decidedly better options than others:
Forget the 3 to 6 months of take-home pay that is commonly parroted throughout financial media and literature. This goal is often unattainable for low-income wage earners. A more realistic minimum target is $2,467. A fund of this amount will be sufficient for most emergencies. Having such a fund stops you from getting stuck with short term remedies with long term consequences like being late on rent or borrowing from a payday lender. Often creating a cycle of cash draining late fees and prolonged financial insecurity.
Building an emergency fund is your #1 priority. You should well establish an emergency fund before you divert resources to the very prudent debt reduction strategy necessary for your long term success. You should continue or start making all minimum payments on time and continue to do so until your emergency is well funded.
Debt reduction is achieved by consistent application of payment to the principal balance. Having an emergency fund will let you maintain a good payment history so you won’t have to “rob Peter to pay Paul” when the inevitable happens. One missed credit card minimum payment can close off what may be a critical asset during a financial emergency and put a big hole in your safety net. Modified universal default terms may render a late payment to one lender a catastrophe in your creditworthiness regardless of your actual payment history.
Your ability to borrow should be viewed as part of your safety net. It creates capacity and demonstrates financial capability. Your credit card cash advances and spending limits arecritical components that can be managed to help mitigate some of the impacts of an emergency and buying you time. An excellent credit score can give you immediate access to additional money during an emergency. It is a MoneySmartLife strategy to responsibly and proactively expand your borrowing capacity annually. Just as your net worth expands annually so should your credit capacity. They weave your safety net tighter and softer.
There may come a time in a relationship, as things get more serious, the question, “what is your number?” may be asked. Of course, that question is normally only asked or answered in a serious relationship.
So assume, the relationship is serious enough to provide an answer. There is a decision to be made on how to answer. Self-inflicted shame and guilt may tempt you to be other than honest. What kind of number is acceptable for your partner?
Does your behavior contradict or affirm your goals/beliefs? Are you worried what your number says about how you behave and what you believe.
If you are going to answer, you should answer the question honestly. You should have answered it for yourself, honestly, by now. By the way, if you can’t answer honestly; you are not serious about the relationship and self-deceived.
So how should you answer the question, “What's your number?”
Get your mind out off your crotch, for minute. I’m not talking about sex but rather money.
I'm talking about your savings number. Your debt number. Your income number.
Just as it is important to know your partner’s sexual behavior, likewise for money behaviors. STDs are real. Avoid STDs, sexually transmitted debt. Know your risk factors and resources.
If you are serious, here are some numbers you need to understand about your partner. Some may be deal breakers. Maybe it’s time to be tested.