4 tips for recovering from a financial setback

Financial setbacks like a job loss, medical emergency, or large unexpected expense can happen to anyone. Any of these situations can be overwhelming and disheartening. However, it’s important to remember that rebuilding your finances is doable, and you can navigate through a financial loss and come out stronger on the other side.

1. Assess your current financial situation

Hitting a financial bump in the road happens, and it’s okay to acknowledge where you are without beating yourself up about it. You can’t predict the future and you can’t prepare for everything. We all experience unique financial challenges we never could have planned for or make choices we wouldn’t make again. But now is the time to be brutally honest with yourself about the details.Grab a pen and paper (or open a spreadsheet) and lay out all the details of your income, expenses, outstanding debts, and regular payments. By having a clear understanding of your current financial picture, you’ll be better equipped to make smart, informed decisions on how to move forward.Once you have all this information, calculate your total income and compare it to your total expenses to see if you are living within your means. Next, review your outstanding debts and prioritize them based on interest rates and how much you owe. This will give you a clear picture of where things stand.

2. Review and adjust your budget

Now that you have a good grasp of your financial situation, you're ready to adjust your budget to help you get to where you want to be. And, if you don't have a budget, now's a perfect time to create one. With a realistic budget, you can better track your income and expenses, and also identify areas where you can cut back on spending.For example, imagine you’ve been using a budgeting app to help you stay on top of your financial goals, and you notice that you’re spending a lot of money dining out with friends each month. You realize that you often prefer to spend time with friends in a quieter setting, so you decide to cut back on eating out and instead prepare meals at home with your friends.This way, you’re able to continue having fun with friends by inviting them over for a home-cooked meal, and you can reallocate the money you would have spent on dining out toward your emergency savings. Small changes like this can add up to big savings over time—and those savings help you to be prepared in case of a future unexpected expense.Identify your essential and nonessential expenses.Essential expenses are the expenses that are necessary for daily life: rent, mortgage payments, utilities, groceries, gas for your car, etc. Nonessential expenses, often called discretionary expenses, are the things you can typically cut back on or eliminate when you need to, such as: dining out, concerts, subscription services, miscellaneous shopping, etc.Automate the tracking of your expenses.Simplify things by using software or a mobile app that can automatically track your expenses and categorize them for you. This makes it easier to review and understand your current saving and spending patterns so you can be better prepared for financial unknowns. By setting clear financial goals and adjusting your spending habits one item at a time, you can begin to take control of your financial future again.

3. Understand your options for financial help

Finding an approach to managing your finances that factors in your day-to-day and long-term financial goals is key to recovering from a financial setback. You don't have to navigate this alone—there are a lot of people who can help.Speak with a financial advisor.It may be worthwhile to consult with a professional financial advisor who can offer you guidance, support, and valuable insights. They may also be able to help you come up with a plan for paying down debt, and may offer other helpful resources as well.Talk to your friends and family.Your loved ones may be able to offer the emotional support you need as well as share their own experiences of what has worked for them in similar situations.Reach out to your creditors.Ask your creditors if they can work with you to establish a temporary payment plan that fits your current financial situation. If you have medical bills, reach out directly to the hospital or health care provider as soon as possible. Most hospitals offer financial assistance or can help you establish a payment plan to manage the cost of your medical care.

4. Build—or rebuild—your emergency savings

Once you've stabilized your financial situation, you're ready to start preparing for future unexpected expenses. Having some emergency savings—preferably in a high-yield savings account—can help lower the impact of any unexpected expenses that come up in the future.Having emergency savings can help you avoid relying entirely on high-interest loans or credit cards in these moments as well. Think of your emergency savings as a big financial cushion or safety net—designed to add padding or protection to your financial plans.Set up automatic transfers.By automatically transferring a set amount of money from your paycheck or checking account into your savings account each month, you’re ensuring consistent savings without having to think about it. This “set it and forget it” method is both simple and effective for helping you grow your emergency savings over time.See where your savings can make the most impact.Consider opening a Health Savings Account if your employer offers this benefit so you’ll have money set aside for future unexpected medical expenses. HSAs are tax-advantaged, and some employers will contribute money to your account as well.Make small spending changes.In addition to automating transfers into your savings account, look for ways to cut back on expenses and put that money towards your emergency savings. Think twice before buying that new outfit, look for more affordable alternatives for items you do need, and do your best to be more mindful of your spending habits in general. Even a few dollars every week adds up over time.

Bonus tip: Build financial resilience

Keep growing your financial knowledge.Building financial literacy is a journey, so take time to educate yourself on personal finance, budgeting, and investing whenever you can. You’re doing it right now! The more you know about managing your money, the better equipped you’ll be to handle and rebound from financial challenges that come your way in the future.Rebuild your credit score.Rebuilding your credit score is like building a solid foundation for your financial future. Having a strong credit score affects whether you’re able to get a loan, open additional credit cards, and even buy a car. Some simple steps you can take to rebuild your credit score include:Pay your bills on time: Set up automatic payments or reminders to make sure you don’t miss payments.Avoid high credit card balances: Carrying high balances on your credit cards can hurt your overall credit score.Check your credit report: It’s important to monitor your credit report regularly for any issues, such as fraudulent charges or other errors.Limit your number of credit cards: Avoid applying for too many credit cards—especially within a short period of time—as this can directly impact your credit score.

A financial setback doesn’t determine your future financial success

By reading this article, you’re taking steps to understand, navigate, and shift your finances and improve your well-being. Getting yourself to solid ground and building financial resilience are impressive feats that can set you up for long-term success. Celebrate every win. You’ve got this.