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Rainy day funds: the real value of Financial Resilience

30 July, 2021Tom Renshaw

Tom RenshawTom Renshaw was highly commended, in the 16-17 age group in this year’s Young Financial Journalist competition for this essay, which explores what the real value of financial resilience is.

What is financial resilience?

Between the months of January and November 2020 the number of UK citizens claiming universal credit rose by 3 million, to 5.8 million people – an increase of roughly £16.8 billion.

Years of negligence on the importance of educating young people on financial resilience resulted in a generation of financially vulnerable adults, easily impoverished when faced with the huge job losses of the Covid-19 pandemic. But perhaps the extent of this economic devastation could have been reduced if more young people were taught about the value of the ‘rainy day fund’.

At its heart, financial resilience is defined by the ONS as “the ability to cope financially when faced with a sudden fall in income or unavoidable rise in expenditure”. In everyday terms, it’s having enough money saved to withstand a life event such as losing a job.

For the majority of young people, financial responsibilities are little to none, meaning they rarely understand the importance of saving their income. All too often children are told to save by their parents but without being properly taught why, thus leaving them unprepared as they enter adulthood and the financial burdens that come with it.

 

So why should you save?

 

The importance of financial resilience

Financial resilience is arguably most important amongst young adults as they suffer huge costs from rented accommodation and young children, but with some of the lowest incomes and few assets to fall back on.

Consequently, finances can be left overwhelmed by even the smallest, unexpected bills, demonstrated in the pandemic, as households are hit by mass unemployment but with little savings to support them through.

When emergencies strike, the last of your worries should be how you will pay. However, without an emergency fund, debt can accumulate hard and fast, deteriorating an already stressful situation.

In 2020 alone, UK personal debt rose by £21.6 billion, an extra £408 per adult. During economic uncertainty it is easy to turn to credit for the freedom of buying now and paying back later, nonetheless failing to do so can lead you into a financial hole, deepened by interest. Thus the ability to borrow money from your savings when times are rough can be invaluable to your financial security.

Despite being very wealth centered, financial resilience doesn’t only have positive economic affects, it can also contribute to your mental well-being and productivity.

A study by REBA found that 90% of employers felt that financial worries had a negative impact on employees’ mental health, and 87% felt this had an adverse impact on performance. As a result, it is in everyone’s best interest to grow their financial resilience.

How can I increase my financial resilience?

Financial resilience, like other skills and expertise, can be learnt and developed over time.

There are many ways to do this, the most obvious being cutting expenditure. Attempting to save while conserving existing expenditure rates is unrealistic for most incomes, thus increasing your saving ratio is a simple way to set aside money.

Luckily, there are many ways to make saving less noticeable, by enrolling in a payroll savings plan or a bank with ‘Save the Change’ which rounds up your transactions and transfers the difference into your savings account.

Many bank accounts incentivise and reward savers, rather than just interest rates alone, for example LISAs, which add a 25% state bonus to your savings.

Despite being part of the national curriculum since 2014, according to an LIBF study, just 8% of young people said that they gained their financial understanding from school. Thus, education for those households whose salaries are already stretched providing the bare necessities, informs low earners on how they can take advantage of their income.

This assists in saving, without sacrificing consumption. Diversifying your income is also an effective way of protecting yourself in case of job loss. Many in this situation turn to their savings to provide for themselves, however having multiple flows of income reduces your reliance on just the one salary.

But how much to save? Well as a rule of thumb, it is appropriate to have three months’ worth of essential outgoings instantly accessible in savings.

This financial cushion will prepare you for any unexpected bills and provides a bit of time to get back on your feet, if you were to split from a partner or lose your job. While this may seem like a large sum at first, having any amount of money set aside could prove invaluable.

As we have seen, we are a generation of spenders, and it is only now that we are starting to see the true consequences of these habits.

The pandemic has bought financial hardship upon many young people, but from this they will recover, and with a newfound perspective for the importance of financial resilience.

Thus, despite entering 2020 naive of the value of saving, they may soon emerge as the most financially resilient generation yet.

Find out more about our Young Financial Journalist competition