Five Ways You Can Become Less Financially Vulnerable

Each method provides a way to empower and improve your financial situation.

Posted Apr 02, 2018

If I asked you, “On a scale of 1-10 where 1 = “not at all financially vulnerable” and 10 = “very financially vulnerable,” how financially vulnerable do you consider yourself to be?” how would you answer? Public policy makers define a financially vulnerable consumer as “someone who, due to their personal circumstances, is especially susceptible to detriment.” With this perspective, an individual with a physical or mental disability, a long-term illness, someone who is older (over 80) or has low literacy or numeracy is considered as financially vulnerable.

Stories Chapter 1 by Sydney Sims Unsplash Licensed Under CC BY 2.0
Source: Stories Chapter 1 by Sydney Sims Unsplash Licensed Under CC BY 2.0

I feel such a view limits the significance of financial issues that affect us. The truth is that we are all financially vulnerable to a lesser or greater extent whether we have disabilities or not. Instead, I like to think of financial vulnerability as “a slow-changing psychological state indicating the degree of the individual’s susceptibility to making bad financial decisions and experiencing negative financial outcomes.” Financial vulnerability applies to everyone and is a matter of degree.

In an ongoing research project, I have been compiling a list of factors that contribute to an individual’s financial vulnerability. Through this work, I want to figure out how we can reduce our financial vulnerability in a world that seems increasingly uncertain and hostile.

In this blog post, I want to share a list of five factors from my list that contribute to an individual’s financial vulnerability. Each item offers an opportunity to strengthen your financial condition and reduce your exposure to ill-advised money choices and outcomes.

1. Knowledge about how personal finances work, also known as financial literacy.

Economists have studied financial literacy for decades, and have found that a basic understanding of how personal finances work (e.g., stocks are riskier than bonds, but provide a higher return over the longer term) is crucial to making good financial decisions. Because many people have low financial literacy, improving factual knowledge about personal finance offers an entry point to taking charge of your finances. Here's a list of resources to improve your financial literacy.

2. A detailed understanding of one’s own financial situation.

 A different form of financial knowledge is an understanding of your own current financial situation, e.g., how much money you take home each month, your monthly expenses, how much and what types of outstanding debt you have, your level of savings, etc. In my own research, we have found that a person’s financial self-awareness contributes to positive financial outcomes. If you don’t have it, it is worth sitting down and acquiring an in-depth understanding of what your current situation is, regardless of how good or bad it is. This self-knowledge will make you less financially vulnerable. Here's a set of tools to help you assess your financial condition.

3. Level of interest in the domain of personal finances.

Some people simply don’t care about the domain of money and personal finances. They tend to pay insufficient attention to money issues, making them prone to hasty or ill-thought-out decisions. If you belong to this group, treating your personal finances as you would treat gardening, cooking, wood-working, or your favorite hobby is one way to increase interest and involvement in this domain. Personal finance can be an acquired taste. Because of how important it is for your well-being, it is worth trying to acquire a taste for it.

4. Delegating financial decisions to others.

Either because they are not interested or on the flip side, because they are too vested and afraid of adverse consequences, many individuals tend to delegate financial decisions to others. In a marriage, for example, one spouse may shoulder all the responsibility of making and executing financial decisions, while the other one knows little and plays no role at all.  Such a lack of personal involvement can be costly, if something happens to the decision maker or if the marriage dissolves. And the antidote is obvious. Even when involving others, you must play an active role in financial decisions.  

5. Cultivating habits that support prudent financial decisions and behaviors.

I have written before about the importance of cultivating the habit of saving money regularly for a comfortable retirement. This concept also applies to other areas of personal finance, whether it is avoiding impulsive or excessive shopping, investing effectively, or donating to worthwhile charitable causes. Habits provide the scaffolding on which to construct a financially sound state and to insulate yourself from making bad decisions.

Other methods that support financial health

In addition to these five factors, there are other ways to strengthen your financial condition. Setting and then diligently pursuing financial goals is particularly important if you are not yet enthusiastic about personal finances and haven’t formed good money habits.

After fifty years by Lotte Meijer Unsplash Licensed Under CC BY 2.0
Source: After fifty years by Lotte Meijer Unsplash Licensed Under CC BY 2.0

Deliberately regulating your behavior involving money, particularly your spending activity, is particularly significant in the early stages.

Later on, as you develop an interest in this topic and cultivate supportive habits, following an overall lifestyle that downplays consumption for its own sake or as a signal of status or identity, and promotes pleasure from measured consumption becomes important. Frugality and enjoyment don’t have to be in conflict, they can coexist and support your lifestyle. And finally, how you respond emotionally to money and your personal finances is important. Does thinking about these issues make you anxious, fearful, or frustrated? Or does it produce a sense of satisfaction, peace, and eagerness to learn and remain in control?