Financial Insights | November 17, 2018
Bad things happen to good people all the time. But whatever crisis befalls, you’ll be far better equipped to handle it if you have financial intelligence at your side.
In honour of Financial Literacy Month, brought to you by CIBC, we’d like to discuss several strategies for increasing your financial IQ and simultaneously preparing you for the unexpected.
The first step in preparing for crisis is not creating it. If you don’t intentionally live by a budget and manage your debt, you can fall into financial crisis of your own accord.
Implement a debt elimination plan today and prioritize it above all other financial strategies. You can’t start saving for a business if you’re constantly living in the red.
Eliminate debt by managing your payments. Take care of your bills before the due dates so you don’t accrue late fees. Pay down credit cards quickly, starting with those with the highest interest rates. Evaluate your lifestyle and cancel any unnecessary subscriptions.
Having good credit and avoiding debt can open a lot of doors for you, in your personal and business finances. When times of crisis come, you will be more likely to get a loan if needed. If you don’t have a large balance built up, you can also rely on pre-existing lines of credit before having to borrow additional capital.
As you start your entrepreneurial journey, your personal credit can also affect your ability to get funding. Lenders want to know if you have successfully managed personal finances, as that will be an indicator to whether or not you can manage business finances. Even if you have the best business plan, you are unlikely to get a loan if your credit history is poor.
For personal or financial crisis, established short-term savings can make a big difference. Chart your monthly income and expenses so you’ll know what you need in the case of an unexpected change.
A good practice is to put three months savings in an emergency fund. This can seem like a lot of money, but if you just pull a little bit out of each paycheck, you can build this amount pretty quickly. If three months is too daunting, choose a more doable number like one month—some savings is better than no savings.
Once you’ve reached your rainy day total, don’t touch it. You can put this fund on a separate debit card or savings account, so you aren’t tempted to use it when evaluating your current assets.
And be strict with yourself—only use these funds in case of emergency. Wanting the latest smartphone model or a trendier car does not constitute a crisis! Your short-term savings needs to be readily available when something unexpected happens, so don’t waste it on nice-to-haves.
In addition to emergency savings, you ought to save for the future. Having more than just one fund established will ease your peace of mind should crisis situations arise.
Preparing for retirement is a great place to start. Take advantage of employee benefits, like retirement plan matching if your employer offers it. There are ways to access these funds early in the case of true emergencies.
Diversifying assets is also a great way to prepare for the future. Entrepreneurs tend to put all their eggs in one basket, but it’s important to realize that diversification lowers your risk of financial disaster immensely. Make sure you’re invested across a variety of asset classes: think stocks, bonds, real estate, cash, and so forth.
Putting some of your wealth into “illiquid” assets (assets that can’t be quickly converted to cash) may yield better returns—that’s what’s known as a “liquidity premium.” At the same time, you’ll want to make sure that at least some of your savings is fairly liquid (even if it’s not yielding returns quite as high) so that it’s available to you if that rainy day comes.
If you are looking to start a business in the future, make sure you understand what that will take and have a specific financial goal to get there. Establishing a plan and having a desirable goal in mind will take the pain out of saving, because you’ll know what you’re working toward.
Because crises are unexpected, it may seem strange to have a plan, but it can make a big difference. Even if you don’t have a plan written out, knowing how to distinguish between wants and needs will help you be financially intelligent in the wake of disaster.
When crisis comes, you need to be able to prioritize what gets paid for and when. Make a list of the order of highest priority bills and know which ones you can afford to delay or cut out. For example, you probably can’t afford to miss a mortgage payment, but you may have something you can be more flexible with–selling an extra vehicle could get rid of a car payment, or you may be able to work out a different, longer-term payment plan with a student loan or medical bill. Instead of randomly paying bills as they come, note the highest interest rates, due dates, and available payment plans.
You’ll also want to make sure that any credit-reporting entities that bill you get paid in full and on time. Keeping your credit strong is essential, and late, partial, or missed payments can have a strong effect quickly.
Sticking to a plan of routine maintenance is another great way to prepare for possible crisis. Routinely maintaining your car, your home and your health can help you avoid unexpected costs in the future.
As an entrepreneur, having a business recovery plan is essential. Startups often encounter financial crisis as well, so you ought to know where your funding sources are and where you can cut back if necessary. If you have investors, make sure they are up to date on the financial situation of the company and know where they stand on continuing to back your vision.
In your personal finances or as a business, knowledge of financial terms, reports and processes is crucial. This can be as simple as reading a book on personal finance or taking an online course. There are many free resources available for those who want to understand financial jargon and trends.
Entrepreneurs need to become financially literate as well. Just because you have a great business idea doesn’t mean you know anything about finance. Many startups fail because founders neglect the financial processes that keep businesses running. Basic tasks like knowing how the purchase process works and managing accounts receivable can make a big difference for new companies.
The first place to start is by charting what’s actually happening with your money. Track net worth so you can produce regular financial reports for analysis. Keeping up-to-date books is a simple process that can save you future stress. Consider cloud-based accounting options like Xero vs. QuickBooks or alternatives.
Keeping your records current can help you avoid financial disaster, but learning to use those numbers to create financial reports will offer opportunities to thrive. Reading financial statements intelligently will help you understand the underlying data that results in your business growth or failure.
When unexpected things happen, you are the best (and sometimes the only) resource that you can really count on. Money in the bank will be of value, but as a person with intelligence and skills, you are of great value as well.
Prepare for crisis by diversifying your professional skill set. Stay current with trends in your field and become indispensable to your employer or customers. Take advantage of any available trainings and consider taking a new course or pursuing additional certifications. Consider a side hustle or small sources of income like online surveys, freelance or ecommerce.
If you needed to switch jobs for whatever reason—family, location, pay—it should be easy. Keep your skills and resume current and maintain a valuable network.
Your financial literacy can affect your quality of life significantly—whether you’re 19 or 99. So take the necessary steps to be prepared for emergency and learn the skills that will help you to be financially resilient.
And remember, focus only on what you can control. You can’t control the fluctuations of the market, unexpected layoffs or personal tragedies, but you can control your preparation for those events if and when they come.
About the author
Jaren Nichols is Chief Operating Officer at ZipBooks, free accounting software for small businesses. Jaren was previously a Product Manager at Google and holds an MBA from Harvard Business School.