Four steps to building financial resiliency into your investing journey

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For many new and experienced investors, it can be challenging to invest and work to achieve financial goals while managing the rising costs of daily life. However, developing certain behaviours and processes in relation to your money can help you stay on track as well as build your financial resiliency. These steps hopefully mitigate stress and help you weather the storm of rising costs.

November is Financial Literacy Month, a time when Canadians are reminded to strengthen their financial knowledge and resilience. The following four steps can help you become more financially resilient.

  1. Practice financial self-awareness
    When times are tough, ignoring your financial situation and maintaining your current spending habits can be comforting. However, this feeling of comfort may be short-lived though, as uncertainty can become a source of anxiety. Instead, practice financial self-awareness by staying mindful and fully engaged with your finances. By assessing your income, expenses, savings, investments and debts, you can better understand where you can cost-cut, which debts to pay off sooner, and how to rebalance your spending towards necessities and long-term goals.
  2. Recognize what you can and can’t control
    It is critical that you recognize that certain factors – such as interest rates or a possible economic recession – are beyond your control. However, building a plan that factors in worst-case scenarios can help make you feel empowered when times are unpredictable. For instance, if you’re worried about the market heading for a recession, consider the time horizon of your investment goals and if you are well-diversified to reduce the risk you are taking on. If you need more assistance with your financial planning or reviewing your investment portfolio, a certified financial planner or registered investment advisor can help you better plan for the future.
  3. Create and maintain an emergency fund
    An emergency fund is a savings account dedicated to helping you cover life’s unforeseen costs without having to draw from high-interest debt options such as credit cards or selling your investments early. One of the best ways to establish an emergency fund is to start small, setting aside a small portion of every paycheck into a savings or high-interest savings account. Over time you can automate them through your bank or credit union, or even increase your contributions as your budget allows. Creating an emergency fund equivalent to three to six months of your typical expenses can provide you with peace of mind that you can sufficiently cover most emergency costs.
  4. Prioritize paying down consumer debt
    Consumer debt, such as credit cards and the negative compound interest they generate, can limit the money you have available for day-to-day life as well as your ability to save and invest. Only paying the required minimum on your credit card will help you avoid additional late fees, but will only pay off a fraction of the principal loan. Worse, ignoring your debt can compound the interest. For example, if you did not make any payments on a credit card with an interest rate of 24.99 per cent (the annual percentage calculated daily and charged on any balances carried from month to month), the amount you owed would double after just four years. Paying down your debt frees up your future earnings so you can use them elsewhere.

Building financial resilience takes time and conscious effort, but developing healthy habits now can pay off for years to come. This November, take small steps – track your spending, start an emergency fund and/or make a plan to pay down debt.

Saving to invest: How to create and maintain an emergency fund

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Emergency funds are one of the most important accounts you should have to establish long-term financial security. Also known as a slush or rainy day fund, an emergency fund is a dedicated account for life’s unexpected costs and emergencies. As the ongoing pandemic has shown all Canadians, having an emergency fund is not just optional, it’s critical. In general, the Financial Consumer Agency of Canada recommends having an emergency fund with the equivalent of 3-6 months of regular expenses saved.

What do emergency funds have to do with investing?

Investing for success requires thinking long-term and maximizing the compounding interest of your investments over time. Compound interest is simply the money you earn on reinvested interest from a previous period. If you contribute consistently, and do not withdraw funds early, it can grow rapidly.

A common mistake many investors make is disregarding an emergency fund to dedicate more money towards their investments. This leaves them in a precarious position in which they can’t afford to pay for an unexpected cost (like a car repair) without cashing out investments early. It can also significantly impact their wealth building and financial goals. If you haven’t started an emergency fund or have trouble building and keeping an emergency fund, consider the following:

  1. Automate contributions to your emergency fund
    The more you can make dedicating a small portion of your income towards your slush fund a habit, the easier it becomes. One of the easiest ways is to review your budget, establish a figure you can comfortably tuck away, and then set up automatic deposits with your bank.
  2. Keep your emergency fund separate from your regular accounts
    To avoid inadvertently spending your emergency fund on non-essential purchases, a common practice is to hold your emergency funds in a separate high-interest savings account or even another bank. This ensures the money is still accessible when needed, but not readily available for daily or online purchases.
  3. Pause your investment contributions
    If you have no emergency savings, you should pause the money you direct towards your investments for enough time to build up some emergency savings. While it may feel underwhelming to stop your contributions, you are establishing a safety net that can help you maintain your investments and weather the unexpected in your daily life.
  4. Replenish your emergency fund
    One of the most important things you can do to maintain your emergency fund is to replenish it when it’s depleted. After using the fund, establish ongoing contributions to build it back. This way, you ensure it’s ready for the next unforeseen cost.

By establishing an emergency fund and maintaining it throughout your life, you can confidently invest for the long term and rely on a solid foundation of financial security to support you through life’s many challenges.