4 Ways to Overcome a Financial Setback

How to recover from a financial setback

Money touches everything. Emergencies are no exception.

When you hit a major setback, be it a career crisis, a health crisis, a relationship crisis, or otherwise – the money you do or don’t have available will play a major role in determining your options as you try to get back on track.

The sooner you tackle these inevitable setbacks, the faster you can get back on track to rebuilding your finances and your future on your terms.

The framework below can give you a way of approaching these tough times in a way that serves your immediate needs without doing any unnecessary damage to your long-term financial goals.

I know it’s not fun to think about, and honestly, there may be some tough choices you have to make along the way. But the sooner you tackle these inevitable setbacks, the faster you can get back on track to rebuilding your finances and your future on your terms.

Step One: Consider the Costs

Whether it’s a medical emergency or a hit to your cash flow, your first step is to get clear on the projected cost of your setback.

For example, if you’ve lost your job, you might predict that you’ll need around six months to find a new job. In this case, you’d calculate how much money you’d need to support your basic cost of living for six months.

The goal is to get clear on what financial resources you need immediately to support you through your setback. Obviously, this is going to be an estimate.

It might take more or less time for you to find a new job, but doing some research and making some cost projections can help you start grounding your way back to financial health with tangible numbers and action steps, rather than just crossing your fingers and hoping you’ll get through it.

Step Two: Cut Back Where You Can

It’s easy for financial setbacks and emergencies to snowball into runaway trains of expenses.

For example, if you go through a break up with your live-in partner, you may need to move and cover your new housing and moving costs. But the cost of brand new furniture, accessories and decor for your next place isn’t so much a financial emergency as it is a financial goal. So remember to stay grounded in your true necessities when considering your emergency costs, and see if you can find ways of reducing, negotiating or even eliminating some of your necessary expenses.

For example, if you’re moving out of an old place, maybe you can cut your costs by downsizing when you move or renting out a spare room in your new place or maybe even stay with family for a while?

While not always ideal, these alternatives can help reduce the immediate impact on your financial life, giving you more time to save up for future financial demands.

For example, if you can stay with friends or family while you are saving up for your own place, that can alleviate some of the emergency funding you need right away.

Step Three: Take Inventory of Your Financial Options

Once you figure out how much money you need to manage your setback and get back on track, the next step is to take inventory of your funding options. That is, where are you going to get the money to cover your costs?

If you have an emergency savings account with enough funds, you may be able to recover pretty quickly by pulling out some cash to satisfy your immediate needs. (Though you will want to make rebuilding your cash cushion a priority as soon as possible.)

The “fun” budget you have to slash short-term will probably be worth the peace of mind that comes with getting back on track financially.

If you don’t have the money on hand, look at your current spending to see where you can make immediate adjustments and free up some cash. Can you rent out your place and crash with friends for a few weeks? Can you give up the gym membership and cable for a couple of months? Can you put a freeze on your entertainment budget?

Remember, these changes don’t have to be forever, they’re just temporary trade offs that can help you fund your urgent, emergency need. So keep that in mind as you consider these sacrifices. The “fun” budget you have to slash short-term will probably be worth the peace of mind that comes with getting back on track financially.

If emergency savings and cost cutting aren’t enough to get you back on track, it might be time to consider your financing options. Maybe you can borrow money from a friend or relative? Maybe you can take out a personal loan? Maybe you apply for a credit card that lets you work your way out of your temporary financial setback with a great introductory interest rate?

Clarify how much you need to finance and consider the best option for you based on the resources you have available, the circumstances of your financial setback and your anticipated timeline.

Step Four. Make a Plan for Getting Back On Track

Once you’ve settled on a funding strategy for your emergency, it’s time to make a plan for getting back on track.

For example, if you’re going to use your emergency savings, a loan from a friend and a credit card to cover the cost of your emergency, how and when will you begin the process of repayment? Will you rebuild your savings first? Will you pay back your debt first? If so, which debt?

Remember that in addition to temporary cut backs to your budget, you can also look for ways to bring in extra money to expedite your financial recovery

What specific financial changes are you going to make to prioritize this repayment? Are there any things you need to do, expenses you need to reconsider or plans you need to cancel to implement these changes? How much will these changes free up in your budget and how soon will you be able to start and complete the repayment process?

Keep in mind, some of these sacrifices may be one-off expenses. For example, you may decide you can’t make it to your college friends’ wedding after all or that you’ll have to wait for Beyonce’s next tour to get tickets. Other sacrifices may come from your more consistent expenses. For example, maybe you cut out your Blue Apron subscription or Seamless orders until you’ve got one of your debts paid off.

Once you get clear about what temporary changes you’re willing to make to repay or rebuild your emergency funding sources, consider how and when you’ll reincorporate some of these expenses, if you will at all.

For example, at what point in your repayment process will you resume your Blue Apron membership? When your credit card debt is gone? When you’ve paid back your personal loan? When you’ve rebuilt some emergency savings? Maybe once you’ve done all of those things.

Whatever it is, get clear on the concrete changes you’re going to make and the projected timeline. Remembering that it’s all temporary and that you don’t have to give up meal delivery or Beyonce tickets or going to friends’ weddings altogether, can help make the process of financial recovery far more manageable.

Remember that in addition to temporary cut backs to your budget, you can also look for ways to bring in extra money to expedite your financial recovery. Maybe you rent out an extra room or you pick up some weekend babysitting shifts.

Again, these don’t need to be permanent commitments, but the more extra income and temporary cutbacks you’re willing to make, the sooner you can get back to financial health.