By: Gerelyn Terzo of Sharemoney
The saying goes, ‘When the going gets tough, the tough get going.’ When you experience a financial setback, that can be easier said than done; however, just because your finances may be out of order doesn’t mean it’s time to give up. The truth is, nearly two-thirds of Americans are living paycheck to paycheck, a LendingClub report reveals. So any disruption in their finances would be extremely damaging.
Some of the most successful people financially have failed at one time or another in their lives. Dave Ramsey. George Foreman. Walt Disney. These are just a few of the individuals who filed for bankruptcy before they ever became successful financially.
The important thing is to get back on the horse, so to speak, and take steps toward rebuilding your finances after you experience hardship. We’ve developed a step-by-step guide to help you do just that.
As the saying goes, ‘Those who cannot remember history are doomed to repeat it.’ That’s why one of the first things you’ll want to do is identify what went wrong with your finances.
Sometimes it’s obvious. For instance, you may have faced a $20,000 medical bill that drained your savings account. However, many times a financial setback occurs after a series of missteps. Retrace your spending and recognize where you may have overspent by trying to keep up with the Joneses, for example. Once you identify the pattern, avoid doing the same thing next time.
One of the worst things you can do during a financial crisis is to panic. This could lead to making emotional decisions or getting stuck in depression. Try looking at your situation objectively and removing the emotions from it as you seek to rebuild your finances. Focus on the earlier steps, including cutting your expenses and increasing your income. If you’re struggling with this step, seek a support system so you don’t feel you are facing the situation alone.
If you are rebuilding your finances, you must determine how much your income was lost. Whether it is a specific financial amount or certain assets, like a home or a car, be sure to document everything lost to the financial setback. This will help you to determine just how severe the situation is. Or perhaps it’s not as bad as you think. Either way, make a list.
Another important step is to readjust your spending habits. A good way to do this is to create a monthly budget. If you’ve already got one in place, perhaps you didn’t stick to it as planned, and that’s part of the problem. In any case, the budget should help you identify ways to cut your spending so you’ll have more cash. It can also help to alleviate stress, as you can see a snapshot of your finances in an organized fashion.
After cutting expenses, the next logical step is to earn more income. This is one of the surefire ways to rebuild your finances after suffering a financial setback. The technology era paved the way for mobile apps offering more daily services. Or you might try to secure additional hours at your day job.
With the added income, you pay your bills and debts you might have missed. If your credit score took a hit, making these payments on time will help rebuild your damaged credit from the setback.
On your path to financial recovery, focus on paying the most urgent bills in the coming weeks and months. If you’ve been laid off, see if you are eligible for unemployment insurance. Put your energy toward earning income. Place any other tasks that won’t improve your money situation on the back burner if you can so that you can devote your energy toward rebuilding your finances.
It’s not unusual to be feeling discouraged after a financial setback. While you will benefit from looking at your situation objectively, you might not be there yet. In the meantime, avoid making major decisions concerning your finances if possible. Your thinking might be clouded as you begin to walk things out, and you don’t want to do anything to make life harder for yourself. Investors are given similar advice so that they don’t make decisions based on the two dominating emotions: fear and greed.
To-do lists are great. But it could seem daunting to attain all the major financial milestones you’re looking to achieve, especially when you’re just coming off financial hardship. Experts agree a better approach could be to set yourself a financial goal that’s attainable in the near term. It could be building an emergency fund or paying off debt. When you reach it, you’ll experience a sense of accomplishment that might have been missing through the turmoil. It could serve as a good motivator for this next step.
It’s one thing to have money socked away under the mattress. But with rising inflation, your purchasing power is diminishing in this economy. As a result, it’s important not only to save money with that extra income you’re earning but to save it wisely. Find a high-yield savings account to give you more bang for your buck or reward your efforts. Even if you can only start with a small amount, it’s better to start with little than to do nothing.
Finally, be patient with your financial recovery. You’ve been through a major setback, and rebuilding everything you lost and then growing might take some time. If you follow these steps to rebuild your finances, it won’t be long before your helping someone else in need.
Even baby steps will get you closer to your goal of rebuilding your finances. Remember, you probably didn’t get into this situation overnight, and fixing it might take some time.
But with discipline, hard work, and action on your part, you’ll recover your finances and learn enough to prevent the same thing from happening again. And if you ever find yourself in a similar situation, you’ll know exactly how to get out of it next time.