How To Build Financial Resiliency
Managing money is a lifelong project, so you're going to want to read this post
Making of a Millionaire is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.
Financial literacy is only the tip of the iceberg of what’s required to manage money.
Early in your financial journey, financial literacy is basically all that matters. You need to learn how money works and build systems to help you track and invest your money, pay off debts, and create and achieve financial goals like saving for your kid’s college education.
While there’s always more about specific financial matters to learn as the years go by—e.g., negotiating interest rates with your bank or salary with your employer— it doesn’t take all that long (relative to how long you live) to build a financial plan.
The real difficulty comes five years into that financial plan when you’re unexpectedly divorced, and the plan you were building with a partner needs to get thrown out the window. You not only need to start a whole new financial plan but a whole new life—under what is likely an incredibly emotionally draining circumstance.
Building a retirement plan isn’t hard. Sticking to that plan once you have your first child and your life becomes chaotic—and expensive—that’s hard.
Managing money is a lifelong pursuit, and life itself is unpredictable. Many amazing and terrible things will happen along the way, all of which will test your financial plan and your resolve to stick to—or adjust that plan as circumstances dictate.
To withstand the inevitable adversities of life, you need resilience. Since you need to continue managing money through these adversities, you need to be resilient to be great with money.
What does it mean to be resilient?
Here’s the definition of resilience from the American Phycological Association.1
“Resilience is the process and outcome of successfully adapting to difficult or challenging life experiences, especially through mental, emotional, and behavioral flexibility and adjustment to external and internal demands.”
A bad thing happens, and you adapt and find a way to move forward. That’s resilience.
Reading that definition, it should be clear why resilience is so important to managing money. Financial resilience is the ability to say, “A bad thing happened…but I adapted and stayed on track with my financial goals.”
The million-dollar question is, can you “learn” resiliency, or is it something you either have or don’t have from birth?
Many researchers agree that while some people are born naturally more resilient than others, everyone has the capacity to increase their resilience.2
Pick up your copy of The Financial Freedom Equation
3 ways to Develop more resiliency backed by research
#1—Build an optimistic mindset
Researchers have found that optimistic people are much more likely to be emotionally resilient.3 Building an optimistic mindset is an important topic that I have covered in detail over two separate posts.
In this post, I outlined why “rationally optimistic” people make the best money managers.
In this post, I provide research-backed exercises you can do every day to build a more optimistic financial money mindset.
#2—Let it go
When you make a financial blunder—like losing money on a bad investment—it’s common to replay that scenario in your head on an endless loop. Constantly reliving each moment along the way and beating yourself up for real or imagined mistakes you made that contributed to that negative outcome.
Psychologists refer to this process of constantly reliving negative or traumatic events as "rumination." Research has shown that otherwise healthy people who tend to ruminate on negative events are more likely to develop depression and anxiety and become more prone to anger.4
A vital step to building a more resilient mindset is to reduce the destructive impacts of rumination.
In a 2012 study titled "Getting Out of Rumination: Comparison of Three Brief Interventions in a Sample of Youth," researchers Lori Hilt and Seth Pollak found that practicing mindfulness is an effective way to break the cycle of rumination.5
You may recall from this mega post that practicing mindfulness was found to help cultivate an optimistic mindset—providing further linkages between optimism and psychological resilience.
Another key finding from the research by Hilt and Pollak was that mindfulness or even simple exercises to distract the mind were much more effective at reducing rumination than problem-solving. When something bad happens, a lot of people (myself included) have a tendency to jump into full “problem-solving mode” and try to fix the problem ASAP. Here’s why that may not help you break free from rumination.