3 Steps To Recovering From A Financial Setback
Is it possible to financially recover from a crisis? (Hint: YES!!!)
You CAN recover from a financial setback! Your speed of recovery from the financial setback is due to how well you manage money before, during, and after the financial setback.
In the last ten years, we had two separate incidents where we had 2 car accidents followed by a drop in income (yes, you read it correctly 2 car accidents within months of each other, twice).
We felt like we had a "hit me" sign painted on our bumpers. Interestingly, the first incident spun us into a financial major setback, whereas the second incident was an annoying inconvenience but not a financial crisis.
The difference between the two incidents was in how we managed our money when each instance occurred.
In the first incident of the 2 car accidents and a drop in income, we got into $150K of debt. It took years for us to recover from the financial setback.
We may not have been responsible for our car accidents or the declines in our incomes, but we were responsible for not:
Having a spending plan.
Prioritizing savings.
Getting into so much debt that we had no financial margin to handle unexpected expenses.
We thought life would never have hiccups, and when it did, we financially crumbled. I still cringe as I think about the pain we went through to recover from our financial setback.
After this experience, we learned that we might not be able to control life, but we can financially manage the highs and lows of life without getting off track by:
Planning our spending for monthly, short and long-term expenses
Prioritizing savings and treating monthly savings like a bill.
Focusing on paying off all our debt.
Reviewing our insurance coverages to minimize potential out-of-pocket costs.
In the second incident, we yet again (I promise we aren't crazy) experienced two car accidents, both cars totaled, and a reduction in income. This time we:
Had a budget and knew exactly how to adjust our spending when we had a drop in income.
Saved enough to buy two cars with cash, with no debt.
Paid off $150K in debt, which meant we could handle the drop in income.
Improved our insurance coverage significantly reduced what would have been high out-of-pocket costs, saving us thousands of dollars.
The irony is several months after the second incident, we were in a BETTER financial position.
Over the years, I have talked to hundreds of people who quickly recover from a financial setback. I found for all of us, the reasons boiled down to what we did:
Before A Personal Financial Setback: Create a Financial Crisis Plan
During A Personal Financial Setback: Stop Spending Like Your Finances Haven't Changed
After A Personal Financial Setback: Create a Financial Recovery Plan
Before A Financial Setback: Create A Financial Crisis Plan.
Create a Crisis Budget. The #1 goal of a crisis budget is to protect what I call the “Quad of Stability”- food, shelter, transportation, and medical insurance coverage. The other expenses in your crisis budget are expenses you need to keep if you lose your job- internet, cell phone, etc. How accurate your crisis budget is will depend on how well you manage your monthly spending.
Start stockpiling cash in your emergency savings. If you know you are facing a drop in income or a significant life event, focus on savings. Redirect extra money you were using to pay off debt into savings. Not sure where to save? Check out Bankrate's website to look at different savings rates.
Review your insurance. I know this may sound counterintuitive, but consider lowering your insurance deductibles, even if it means a slightly higher payment. Right before we experienced a drop in income, we reduced our homeowner’s insurance deductible. I barely noticed the increased monthly payment. A few months later, when our pipe burst in our kitchen, the extra $30 a month saved us several thousand dollars in costs. You have to weigh the additional insurance premium cost and how much you can comfortably pay if needed.
Pro Tip: If you are worried about a layoff, get every medical, dental, vision appointment, and surgery out of the way now. Find out how much you may have to pay to have insurance if unemployed and factor those numbers into your crisis budget.
During A Financial Setback- Stop Spending Like Your Finances Haven’t Changed.
Follow your crisis budget, tweaking if needed. The crisis budget is an estimate, so you will probably need to adjust. Once your budget is in place, start looking for where you can lower expenses- it may be a cheaper cell phone plan, stop eating out, and even do a staycation.
Contact your creditors, EVEN if you can afford to pay your bills. I cannot overstate that communicating with your creditors is the most important thing to do during a crisis. Talking to your creditors to let them know of your change in circumstances– your mortgage, student loan providers, auto lenders, insurance companies, and credit card companies-shows you are proactive. Creditors are more likely to work with you if you cannot pay your bills.
Have family meetings. Your kids know when you are stressed, and their natural default is to blame themselves. Simply explaining that there may be changes, you love them, and things will be OK, even if it’s different, is all kids need to hear. My husband and I often fought during our first financial crisis and almost divorced. Looking back, my husband said he wanted to provide for us, and the fact he couldn’t hurt him, and it came out as anger. I constantly cried, scared of losing our home and my insecurity came out as anger. You are so much stronger as a team rather than as adversaries. The second time around, we worked together on the finances, so we were on the same page.
Pro Tip: Your crisis budget will tell you exactly how much you can realistically pay creditors without jeopardizing your basic needs. Please understand this will not last forever, and you will make it through this crisis (hugs- I’m a hugger).
After A Financial Setback: Create A Financial Recovery Plan.
When things stabilize, do not make up for lost spending time. When your life returns to normal from the financial setback, do not immediately start adding back expenses. We learned our lesson about the importance of having some money set aside for emergencies. As a result, we first built a small emergency fund of about $1,000.
Come up with a debt payoff strategy. If you took on debt to recover from a financial setback, use a calculator to develop a debt payoff strategy. (This is an affiliate, link-meaning that we may get a small commission at no cost to you if you use the link). As your income goes up, resist the temptation to increase your spending with your income increase. We decided to maintain our crisis lifestyle until we paid off all of our debt. Every financial increase includes a tax refund, job promotion, and bonus towards paying off debt.
Build your P.A.T.H. To Financial Security: Once we paid off our debts, we lived off our “crisis” budget, and we focused on creating a plan to help us get and stay financially secure by:
P-Prioritize our spending with a budget so we can save consistently, pay off debt quickly, sustainably build wealth, and have money for the fun stuff!
A-Adequately insured, so we don't go broke or bankrupt when hit with "life events with price tags"- like car accidents.
T- Targeting investment choices to match our different financial goals so you can financially create a debt-free life you love.
H-Having a written plan if we die early or become disabled, so you have the peace of mind of knowing your family's financial security will be O.K. if something happens to you or your spouse.
Pro Tip: Have “fun” affordable rewards for each milestone. For instance, do a fun family activity when you get to $1,000 in savings. Choose another fun activity each time you hit a goal, even if it’s ice cream. One of my biggest regrets was not taking the time to celebrate wins.
Next Steps
Having a “Serenity Prayer” perspective on managing finances is at the heart of recovering from a financial setback. You may not be able to control the circumstances (job loss, illness, COVID-19) that led to the financial setback, but you make financial choices to help you recover from the financial setback, so the next "life event with a price tag" you experience is an inconvenience, not a crisis by doing the following:
Before A Personal Financial Setback: Create a Financial Crisis Plan
During A Personal Financial Setback: Stop Spending Like Your Finances Haven't Changed
After A Personal Financial Setback: Create a Financial Recovery Plan
Whatever you cannot control, you can learn to manage. You can manage how you handle a financial setback, so you do not get off track from living the life you want.
