Are you in the midst of a personal financial crisis? Perhaps you’re starting over from a divorce. Or maybe you’ve lost everything in a bankruptcy or natural disaster. The most common causes of major financial setbacks are loss of a partner; job loss; medical bills; natural disasters; business bankruptcy and overspending. Any of these things can leave you feeling overwhelmed and unable to move forward towards overcoming financial crisis.
I’m in the midst of my own personal financial crisis, going through a divorce after 20 years of marriage. I was not only in shock but also denial at first and was unable to move forward for months as a result. And the actions we took that we thought were correct, turned out to be massive financial mistakes. On the one hand, I wanted to move quickly to solve the problem. On the other hand, I was not in the best place emotionally to make life-changing decisions that would impact my financial future.
So, how do you make sound financial decisions when you are an emotional wreck? The answer is: you don’t. Don’t make financial decisions when you aren’t in your right mind due to loss or grieving. You absolutely must seek outside, objective, and rational help. Any decision you make could be one you’ll regret down the line.
I didn’t listen to friends’ advice not to sell a property until I had a financial settlement in place. I thought we could just plow ahead. You may think you are doing just fine, but you may not be in the right frame of mind to make sound decisions. One of my clients, after the death of her mother, gave her entire inheritance away to her mother’s favorite charity. Later she regretted it and thought, “You know, I think my mother would actually have wanted me to pay off my mortgage.”
These are challenging times and the decisions you make will potentially have life-long impacts. It pays to get some support and sage counsel during this difficult time. Now is not the time to bravely go it alone or make snap decisions.
The Emotional Toll
Whatever the cause, the repercussions in a financial crisis extend far beyond money concerns. The emotional toll can be immense. From fear and anxiety about the future to guilt and shame over past financial decisions, the impact can be overwhelming.
The Practical Challenges
In addition to the emotional strain, financial crises present practical challenges that must be addressed. From mounting debt and overdue bills to the loss of essential resources like housing or healthcare, the consequences can be severe. Without a clear plan of action, the situation may spiral out of control and make the crisis worse.
Taking the First Step Towards Recovery
Overcoming financial crisis is daunting, but take heart because recovery is possible. By taking proactive steps and seeking support, you can begin to rebuild your financial stability and get back on the path to financial freedom. You’ll come out more resilient in the end.
Following are 7 practical steps you can take to overcome a financial crisis. Each step is designed to help you gain clarity, regain control of your finances, and move forward with greater confidence.
Step 1: Assess the Situation
The first step in overcoming a financial crisis is to assess your current situation honestly. Take the time to review your finances thoroughly, including income, expenses, debts, and assets. By gaining a clear understanding of where you stand, you can identify the root causes of your financial challenge. This will help you to develop a plan to address them effectively.
Action Points:
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- Create a detailed list of your income sources and monthly expenses.
- Review your credit report to identify any outstanding debts or financial obligations.
- Take stock of your assets, including savings, investments, and valuable possessions.
- Consider seeking assistance from a financial advisor or credit counselor for professional guidance.
- If you are getting divorced, get legal advice before making large financial decisions.
Step 2: Create a Spending Plan
Once you’ve assessed your financial situation, the next step is to create a realistic budget that aligns with your income and expenses. (I prefer to use the words Spending Plan because budget sounds so restrictive and boring.) A Spending Plan is your roadmap for managing your finances. It can help you prioritize essential expenses while cutting back on non-essentials.
Many people (me included) tend to put their heads in the sand, avoiding the painful but inevitable need to cut their spending. The best thing to do is immediately stop unnecessary discretionary spending. Most people don’t make dramatic adjustments quickly enough and then end up worsening the crisis.
I realized I needed to track my personal spending apart from my husband’s to determine how much I would need in the future. I opened an online account with Monzo Bank in the UK as it makes tracking your spending a breeze. In the US you can use Empower as they have a free budget and expense tracker. This has been a useful tool to track net worth as well.
Action Points:
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- Identify your essential expenses, such as housing, utilities, food, and transportation.
- Allocate a portion of your income towards debt repayment, savings, and emergency funds.
- Look for areas where you can reduce discretionary spending, such as dining out, clothes, or entertainment.
- Use budgeting tools or apps to track your expenses and monitor your progress over time.
Step 3: Build an Emergency Fund
Building an emergency fund is essential for weathering financial storms and unexpected expenses. By setting aside money in a dedicated savings account, you can protect yourself from financial setbacks and cover unexpected costs without resorting to high-interest debt.
Action Points:
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- Start small by setting aside a portion of your monthly income towards your emergency fund.
- Aim to save at least 3 to 6 months’ worth of living expenses.
- Automate your savings contributions to ensure consistency.
Step 4: Develop a Roadmap for Your Financial Goals
Overcoming a financial crisis requires a detailed plan for achieving your goals. Whether you’re dealing with debt repayment, rebuilding savings, or an investment plan, having a clear roadmap can help you stay focused and motivated.
Action Points:
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- Prioritize your financial goals based on urgency and importance.
- Break down larger goals into smaller, actionable steps to make them more manageable.
- Explore different strategies for achieving your goals, such as debt repayment methods or investment strategies.
- Remain flexible as you navigate your financial journey, adjusting your plan as needed along the way.
Step 5: Increase Income Sources
Increasing your income will turbo-charge your financial recovery efforts. This could mean securing a higher-paying job, starting a side hustle, or exploring alternative income streams. Finding ways to boost your earning potential can accelerate your progress toward financial stability. (You can start with some quick wins by selling unneeded items such as antiques, watches, jewelry, or other collectible items.)
Action Points:
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- Sell items you no longer need or use.
- Update your resume and explore job opportunities in your field or industry.
- Consider acquiring new skills or certifications to enhance your qualifications and marketability.
- Explore freelance or gig economy opportunities to supplement your income.
- Look for ways to monetize your hobbies or passions through online platforms or local marketplaces.
Step 6: Seek Professional Guidance
The right professional support can give you valuable insights when you are overcoming financial crisis. Whether from a financial advisor, credit counselor, or other financial professionals such as lawyers or pension advisors, expert advice can help you navigate complex financial decisions.
My long-time financial planner in New York told me that my husband would be entitled to 50% of my Social Security benefits, even though he is a UK citizen because we’ve been married more than 10 years. I didn’t know this and neither did my lawyer. This has a significant impact on our financial settlement. What you don’t know can hurt you. It pays to get advice from experts (including accountants who can advise you on the tax implications of any actions you take).
Action Points:
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- Research and compare financial advisors or credit counseling agencies in your area.
- Schedule consultations with lawyers and accountants to discuss your situation and goals.
- Ask questions about their experience, qualifications, and approach.
- Follow their recommendations as you implement your financial recovery plan.
Step 7: Stay Committed and Flexible
Finally, staying flexible is key to overcoming a financial crisis and getting back on the path to financial freedom. The road back to recovery is likely to have many ups and downs. Maintaining a positive mindset and adapting to challenges along the way can help you stay on track toward your goals.
Action Points:
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- Stay disciplined in following your budget and financial plan, even when faced with temptations or setbacks.
- Celebrate small victories and milestones along the way to stay motivated and focused.
- Remain open to adjusting your plan as needed based on changes in your circumstances or priorities.
Remember, financial recovery is a journey, and each step forward brings you closer to your ultimate goal of financial freedom. By taking these simple (although not necessarily easy steps) toward financial recovery, you can overcome this crisis and gain control of your financial future. Start now and take the first step today towards a brighter financial tomorrow.
- For more support on your journey to overcoming financial crisis, consider enrolling in my F-I-R-E course. In this course, you’ll gain in-depth knowledge, strategies, and personalized guidance to optimize your finances, cultivate a wealth-building mindset, and confidently navigate the path to financial freedom.
