9 Jun 2020

Does your financial plan pass the resilience test?

By James Goodman

the personal financial impacts of the times. As with life generally, resilience is an important characteristic of your personal financial plan.

In this article I explore some fundamental attributes of resilience - flexible, positive, focused, organised and proactive – and ask does your financial plan pass the resilience test?

Key takeouts  

A resilient financial plan is:

·       Flexible - both able and willing to adapt to different options when faced with uncertainty.

·       Positive - views challenges as opportunities and can reframe situations positively.

·       Focused - maintains a clear focus on the outcome.

·       Organised - has a structured approach to setting priorities and managing change.

·       Proactive - works with change rather than defends against it.

What is resilience?

‘Resilience’ … the ability to recover from, or adjust easily to, misfortune or change.

The past few months have been life changing and challenging.

For all of us, coming to terms with COVID has at certain times been somewhere between ‘difficult’ and ‘overwhelming’. Huge numbers of people losing their jobs, or worried about the prospect. Some parents doing the near impossible of working and home schooling at the same time.  Social isolation has been hard.

Not all the COVID-related changes have been negative of course.  But, the list of changes and challenges is a long one. Each of us has had our resilience tested.

Is your financial plan flexible?

Resilient financial plans are flexible – being both able and willing to adapt to different options when faced with uncertainty. 

Some personal finance strategies leave their owners unable to adapt when bad weather sets in. A common mistake in financial plans is being over-confident with a strategy. Some strategies can, when the winds change, leave their owners forced down the wrong path, or unable to change course.  A high level of debt can work when times are good, but what happens if the income stops? The result can be forced asset sales and a permanent loss of capital. You can’t change the direction of the wind, but you want to be able to reset your sails when it does.

In terms of a willingness to adapt, an example I have seen a few times comes from inheritance.

An inheritance can have a big impact on your financial plan. Your destination (goals) might not change, but suddenly you can find yourself starting from a very different place.

In some respects, an inheritance brings with it two lots of financial strategies (the deceased’s and the beneficiary’s). 

Typically, an inheritance comes after a time of heightened emotion. I’ve seen the uncertainty faced by recipients at this time. Being willing to adapt to strategies that are right for their new situation - rather than being emotionally tied to the prior sets of strategies - is not always easy. Fair enough too, but that willingness, that flexibility, can make a big difference in ultimately fulfilling on what’s important to you.

Is your financial plan positive?

Does your financial plan view challenges as opportunities, and can you reframe situations positively? Some would ask, can you ‘use lemons to make lemonade’?

For example, my client Andrew* was faced with a difficult situation – his sister was diagnosed with a significant health problem, which also became a huge financial problem. Andrew and his wife Emma* decided to help out with a gift, even though it meant consigning two of their own goals to the bin.  Their response was admirable and resilient – they were certainly disappointed about giving up their own goals, but quick to be grateful they could help. The goal of helping Andrew’s sister become more important than the ones in the bin, and their new plan became a positive plan Andrew and Emma were keen to fulfil.

*Names changed.                                   

Is your financial plan focused?

Does your plan help determine where you’re headed in the future and stick to your goals so life’s upsets and other barriers aren’t a deterrent?

In personal finance, this is fundamental.  Be clear about your most important goals, revisit them often, have a laser focus on their achievement, and measure the progress you’re making towards them. That focus means your plan is centred on goal achievement outputs rather than what’s happened in the last week, month, or even year.  A focus on the end goal puts short-term results into context and helps avoid reactionary decision making.

Often when someone comes to talk to me for the first time, they have a ‘strategy’ defined as their goal. For example, ‘My goal is to find assets that produce an income of at least 5 percent’. After some good questions and discussion, the real ambition is revealed – ‘My goal is to spend $150,000 per year, while also leaving a legacy of $3 million for the kids’.

Resilient plans are plans which maintain a clear focus on the outcome.

How organised is your financial plan?

Does your plan develop a structured approach to setting priorities and managing change?

It’s important at all times to have a prioritised list of actions covering the five key areas – financial planning, money management, tax, insurance, and legal.  When the winds of change blow, being organised in this manner brings two benefits –

·       your finances should already be in better shape from the work covered by previous actions, and

·       having an established framework for review and task prioritisation will make it easier to digest changes during what could be a time of heightened stakes and emotions.

Last year, a priority action for clients *Tim and *Beth was to refinance their loans, primarily to give their financial plan the flexibility to borrow for investment if asset prices ever looked attractive. The world has since changed, and this year Tim and Beth are organised in a way that allows them to reset the priority of their actions. This year we’re helping them with the action of being alert to taking some educated risks, and perhaps speeding up the progress towards their goals.

Is your financial plan proactive?

Does your plan work with change rather than defend against it?

Fans of Homer Simpson might recall him telling us the Chinese use the same word for ‘crisis’ and ‘opportunity’ – ‘crisitunity’.

In a crisis asset prices often suffer big falls.  That can be a time to run away from growth assets and avoid loss. However, there is an opportunity to be proactive and work with such a change.  No one knows for sure the direction of asset prices in the short-term, but sometimes taking advantage of an opportunity can improve the long-term outcomes of a financial plan.

Within the COVID ‘crisitunity’, there’s a good example of the ability to proactively work with change rather than defend against it.

Does your plan pass the resilience test?

The five criteria of resilience discussed above can apply to all plans, not just financial ones.  I encourage you to review all your important plans - family, business, and community – with these criteria in mind.

I would particularly encourage you to reference the criteria with regards to your own financial plan. This year has seen all our clients’ plans pass the resilience test, despite the unprecedented challenging times, so we’re confident we can help you.  If you would like to discuss any options for making your plan more resilient please contact me, Brad Church, or a member of our team.  We look forward to helping you.

[Resilience Attributes adapted from Dr Barbara O’Neill, Rutgers Cooperative Extension, 2011]

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