How to recover from a financial setback

What sorts of financial setbacks should I plan for?

Different situations have different considerations, and while no one wants to imagine disaster, it’s smart to know what sort of impact different kinds of events might have on your finances. Depending on the situation, there are also considerations and steps you may be able to take to ensure you have less financial worry should the worst happen. Here are some examples of financial setbacks.

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• Loss of a job. You rely on your job for income, insurance, and other benefits. In situations like a layoff, you may receive severance funds or be able to continue your insurance, but those funds won’t last forever, and costs are often high.
• Loss of a major asset. This can be anything from your car to your home or business. In cases of accident or disaster, insurance can help recoup some of the losses, but replacing what you no longer have or figuring out your next steps can be financially overwhelming.
• Major illness. While health and various kinds of critical care, accident and disability can limit some of these costs, medical bills can spiral and drain even a healthy savings account, particularly since there’s no guarantee on how long conditions and treatments will last.
• Loss of a partner. Losing a partner can be anything from a breakup to death and divorce. While you may be able to collect on a partner’s life insurance, you may face associated debts and funeral costs. In a breakup, your housing costs may increase, and while divorce could end in some financial gain, you may incur legal fees and have to navigate life without cost-sharing.

There are also the more subtle financial setbacks that accumulate over several years, or a combination of low-level factors—a move to a more expensive place, a change in lifestyle or spending, increasing costs—that, combined with one of the above, can make a financial setback even more dramatic. Or perhaps you look at your bank account and credit cards and realize you’ve been living in a quiet financial spiral. Luckily, those things might be easier to shift, and paying attention to them now can help halt and reverse your fortunes.

In general, this is one of those times where planning won’t always equal prevention. Still, a solid emergency savings fund, or even a game plan of what you’d be able to sell or changes you can make, can help you respond more effectively should you encounter a financial setback.

The steps to financial setback recovery

Recovering financially from any of the above will not be overnight. But there are mindsets you can adopt and choices you can make that can make recovery more bearable and give you a chance at restoring your equilibrium.

• Know you’re not alone. Things like this will happen to everyone at least once in their life—they have happened to your friends and neighbors and family. There is no shame in having uncontrollable, unforeseen circumstances impact you, or in having made a few poor decisions and arrived at a catastrophic result, but you can control how you respond, and that can make all the difference in your financial recovery.
• Understand your options. Find the balance between feeling upset and looking at your financial situation. A clear, thorough look at what you have available to you can help you plan or figure out what you can explore. It may also inspire creativity and resilience, and make you feel like you’re doing something productive.
• Channel your energy into a budget. Look at what expenses you must prioritize and what no longer serves you in this current moment. You may need to be ruthless and prepare for serious reductions in what you spend but know that these choices will give you a better shot at surviving the situation.
• Think ahead. When this is all over, where do you want to be? What happens if your health doesn’t improve? Will you be able to sustain a long-term drop in income? These are challenging and perhaps painful questions to answer, but it also can be a chance to reimagine and discover your values. For instance, maybe you’ve always wanted to relocate to a beautiful country with lower cost-of-living expenses. Selling your house not only helps you regain your financial footing but is a step toward that goal. And thinking ahead helps you envision yourself without your current situation, which can both inspire you to find ways to change it and stick to them in the future.
• Ask for help. This isn’t just asking for financial support. This is enlisting the help of professional financial advisors or close, trusted friends and family to sort out your bills and your approach to them with you. It can look like asking for a pep talk from those you love, or a gut check on your decision-making. It can even look like talking to hospitals and creditors to figure out payment plans and timeframes. Help can be hard to think about amid a crisis, but it can come in many forms.
• Move at the speed you need to. Sometimes, in financial free-fall, you need to act quickly to stop the bleeding, such as taking a chunk of out an emergency fund or applying for a loan or selling assets to raise cash. Time can be of the essence and it’s good to recognize situations in which that’s the case. But sometimes, moving too quickly can cut off possibilities that would have appeared with a little more thought and patience. Panic can be motivating, but it also clouds your judgment. And more importantly, reacting to financial setbacks requires processing feelings. For example, losing a partner is a level of emotional turmoil that can lead to choices you might not make with a clearer head and heart.

Financial setbacks aren’t just about what you’ve lost in terms of money. They can shake your entire belief system. But they are survivable and give you a chance to literally revalue what’s most important in your life.