Almost everyone will experience an unexpected financial loss at some point in their life.
In the current cost-of-living crisis, the cost of groceries, utilities and mortgage repayment bills are high enough already, so an added out-of-the-blue expense could be enough to send your finances into a tailspin.
From property damage to an unexpected medical emergency, a job loss or another major money-draining event, these unexpected expenses come at the worst time.
And while many financial advisers say that you should regularly contribute to an emergency fund to help protect yourself against unplanned expenses, not everyone has one in place.
But thankfully a financial setback doesn’t have to be catastrophic, there are other ways that you and your finances can get back on track.
By following a structured approach, you can help you regain control.
Here are six steps to recover from a financial loss:
Step 1: Assess the situation
Take a detailed look at the financial loss to understand its impact.
Review your budget, assets, debts, and income to get a clear picture of where you stand.
Knowing the extent of the damage will help you plan your recovery strategy.
Step 2: Secure against further losses
Now you know what you’re up against, the next crucial step is to stop it from getting any worse.
To avoid repeating financial losses, take steps to protect yourself.
You can consider insurance options such as income protection, health, or property insurance.
Or, review your investments and financial strategies to reduce risk, such as diversifying your assets or setting up an emergency fund to act as a financial buffer.
If you're the victim of a fraud or scam you’ll need to secure passwords, bank cards and accounts against repeat attacks.
Or perhaps you’re going through a divorce or separation - you’ll need to know what is in your joint asset pool and resist being pressured into settling for less than your fair share.
Step 3: Leverage any protection you have in place
If you already have protections, safeguards and back-ups in place in case disaster strikes, this is the time to use them.
For example, an emergency fund offers readily accessible cash to cover short-term outgoings while insurance claims may cover property damage, lost income, or business interruption.
Step 4: Avoid compounding the loss
Cover the shortfall in sustainable ways that don't compound the initial loss.
That means avoiding high-interest debt build-up by doing things like maxing out credit cards, signing up for buy now, pay later credit or taking on non-essential loans.
Step 5: Get professional advice
Consult with a financial advisor to help you make informed decisions about managing your debts, investments, or rebuilding your savings.
Professional advice can offer strategies tailored to your situation, helping you recover faster.
Step 6: Create a new budget
Develop a new, realistic budget that reflects your current financial situation.
Ensure that your budget prioritizes essential expenses, debt repayments, and rebuilding your savings.
Stick to this budget to prevent further financial setbacks
Step 7: Diversify your income
Consider finding additional ways to generate income or investing in low-risk opportunities to help diversify your income sources and better protect your finances in the future.
By diversifying your income streams, you can recover more quickly from financial loss.
Step 8: Rebuild and recover
How you rebuild or recover your loss depends on the value of the unexpected loss and the cause.
In this step, you should focus on building (or rebuilding) your emergency fund, reducing your spending, diversifying investments, implementing written agreements if applicable, and adjusting your retirement expectations to compensate if necessary.
Step 9: Stay positive and patient
Recovery takes time, so it’s essential to stay positive and patient throughout the process.
Keep focused on your financial goals, make gradual improvements, and celebrate small wins along the way to maintain motivation.
Step 10: Learn from it
Even the world’s best and most famous investors have experienced losses, overcome them and learnt a valuable lesson.
As vice chairman of Berkshire Hathaway Charlie Munger once said: “I don’t revisit mistakes to bewail them, I revisit them for their learning purposes.”
The key takeaway…
Recovering from a financial setback starts by understanding the full scope of the loss and taking responsibility for any wrongdoings.
The good news is that recovering from a financial loss, while it is challenging, is achievable with the right mindset and strategies.
By assessing your situation, adjusting your spending habits, and creating a realistic budget, you can regain control of your finances.
Taking proactive steps to secure against future losses will strengthen your ability to rebound from future setbacks and position you to better manage potential challenges in the future.
Ultimately, bouncing back from financial loss can lead to greater resilience and improved financial discipline.
