Financial buffers are a form of protection for individuals and businesses to be prepared for the impact of unanticipated shocks or crises, whether that is due to an economic downturn, a public health crisis, or an unexpected fluctuation in revenue. The lack of preparation for such events can lead to financial instability and jeopardize long-term objectives. By structuring a financial buffer, individuals and businesses can reduce their level of stress as well as the potential of having their long-term objectives compromised. Ultimately, financial security will depend upon responsible and consistent reserve planning.

1. Create an Emergency Fund

The amount of money in your emergency fund should be enough to last you through at least several months of living expenses. There are a few key characteristics when it comes to creating an emergency fund:

• Access to funds immediately

• Funds are stored in low-risk investments

• Emergency fund is in a separate account

Having some kind of financial reserve helps to prevent using high-interest debt during times of crisis.

2. Diversify Your Income Streams

Being reliant solely on one source of income makes you vulnerable to any disruption of that single income stream. To strengthen your overall financial stability, consider adding additional income streams to your financial picture. These could include:

• Investing

• Rental income

• Additional part-time or full-time work outside of your primary employment

Adding other sources of income adds to the overall financial stability of your household.

3. Manage Your Debt Wisely

High levels of debt are detrimental to your ability to have a strong financial safety net. Keeping your debt manageable will give you the flexibility you need to respond to any downturn in the economy. Managing your debt wisely will help to build your financial resilience.

4. Protect Your Assets with Insurance

Insurance will help to reduce your financial loss in the event of a major catastrophe. Some examples of coverage areas for insurance may include:

• Health insurance

• Homeowners/renters insurance

• Insurance for business interruption

Protecting your assets will help to keep your long-term plans intact.

Conclusion

Building a financial buffer is made up of four different components:

1. Establishing an emergency fund

2. Diversifying your income

3. Managing your debt responsibly

4. Protecting your assets with insurance

With proper planning, you can increase your level of financial resilience and decrease your risk of being adversely affected by the uncertainty of the future. Building financial security will allow you to maintain confidence in your long-term financial stability.