Financial resilience is built over time. It requires a consistent focus on spending less than you make, while building reserves and resources to make it through challenging seasons. The best thing about financial resilience is that you can begin or restart at any time, just like starting an exercise routine or diet.
There are two critical elements to consider as you are building a solid financial foundation: Equity and Credit Worthiness. Equity puts you in a position of ownership, where you can borrow against the assets you own. Interest rates tend to be lower when borrowing against your own assets, since you have skin in the game. If you need to tap into any equity you have, do not borrow against more than 70% of the total value of your asset.
Credit Worthiness is the measure of your ability to manage your financial obligations as agreed. Several factors are taken into consideration, including: Monthly obligations as a percent of income, two years’ history of payments and income, late payments or collections, and total credit used of all available lines. As you track and manage these factors, you can build your future ability to access credit when needed.
As you consider these two critical elements, keep in mind how much equity you have and how much you can use without negatively impacting your financial future. Monitor your use of credit closely and make sure your emergency savings can cover at least 3 – 6 months of payments if you lose your job or are unable to work.
Here are a few assets that may have equity you can use:
- Home Equity Line of Credit (set it up while you qualify to use for emergency if needed)
- Refinance or Borrow Against Your Car (under 100k miles and 10 years old)
- Cash Value of Whole Life Insurance (Lock in to lower premiums when you are healthy)
- Stocks (Margin loan on stocks, bonds or mutual funds)
By borrowing against your asset, rather than selling it, the asset may continue to increase in value. Some equity lines can be set up to use if needed at a later date, while other loans disburse funds right away. Be very strategic about the purpose of each potential source of income and make sure you understand the risk of each one before moving forward.
Focus on building your Equity and Credit Worthiness over time. Stay within healthy credit limits. Live well within your means. Save consistently, paying yourself first.