Six steps to recover from a financial shock

It can come in the form of an unexpected medical bill, house repair or job loss

If you don’t have an emergency fund, then a financial shock can provide the motivation to start one. Alamy

Financial shocks come in many forms: an unexpected medical bill, house repair or job loss are among the typical ones.

The reasons for financial shocks may be common, but recovering from them can be unexpectedly challenging.

“These things happen once or twice over a financial lifetime,” says Spencer Betts, a certified financial planner and financial consultant with Bickling Financial Services in Massachusetts. “They can be pretty big, even for a relatively well-off person.”

To recover from a financial shock and to protect yourself from the impact of one before it happens, consider these guidelines from financial experts:

1. Turn to your emergency fund or start one

Mr Betts recommends using an emergency fund as a first line of defence.

“The general guideline is to have three to six months of your expenses set aside,” he says, adding that the money can be kept in an interest-bearing account so it grows.

If you don’t yet have an emergency fund, then suffering a financial shock can provide the motivation to start one as soon as you’re able to do so.

Barbara O’Neill, author of Flipping a Switch: Your Guide to Happiness and Financial Security Later in Life, recommends participating in a savings challenge such as a 30-day, $100 savings goal or trying to save $1,000 by the end of a year to get started.

“You can get a taste of success now that so much has beat you down. You want to turn things around. Starting by saving small amounts at a time can help,” O’Neill says.

2. Tailor your savings to the type of emergency

Mary Carlson, president of the Financial Behaviour Keynote Group, a speaking, consulting and teaching company, says she encourages clients to separate emergency savings accounts into two categories: a “catastrophic emergency” fund for major events such as job loss and death, and a “life happens” fund for things like house repairs.

“When we start to label things what they really are, then we know what to use the money for,” Ms Carlson says.

Otherwise, she adds, it would be easy to empty out your emergency fund for predictable expenses like car maintenance.

3. Cut back on unnecessary expenses

Immediately scaling back spending on variable costs such as restaurant meals and retail purchases can help direct funds to recovering from the financial shock.

“You can’t change rent easily, but you can adjust how much you spend on going out to eat, travel, entertainment and clothes,” Mr Betts says.

“If you can’t pay for everything, you’ve got to cover the basic needs first – food, shelter, utilities – then the things that will bring consequences, like your car being repossessed,” Ms O’Neill says.

4. Ask about hardship options

If it’s still tough to pay your bills, Mr Betts recommends calling your lender or service provider.

“You aren’t going to be the first person to say, ‘Oh no, I overextended myself, can you do anything to help me with these payment options?’” he says.

Companies can sometimes offer payment plans or later due dates for bills.

Ms Carlson says that in some cases, banks will work with customers on short-term loans with a zero per cent or low interest rate to help them get through a challenging period or unexpected expense.

“Be proactive and say, ‘Look, I can’t make this work’. They may have options for you to work out a plan,” she says.

5. Create a timeline and find support

Giving yourself a deadline to get through your financial shock, whether it’s paying off a specific expense or finding a new job, can also make it easier to power through a difficult period, Mr Betts says.

“If you have a precise timeline, whether it’s 70 weeks or 13 months, then you can say: ‘OK, I’m counting down the months, the weeks, the days. This isn’t something I have to do forever, but for a short period of time, and then I’ll be done with it,’” he says.

Sharing that goal with friends and family members can open new avenues of support as you try to reduce spending during that period, he adds.

“If you’re talking to someone you are comfortable with or who might also be going through a crisis, you can go through it together, and it’s easier,” Mr Betts says.

6. Don’t forget mental recovery

Research shows that financial recovery takes time and support, both emotionally and financially.

In his collaborative research on the psychological effects of life shocks on financial well-being, Jesse B. Jurgenson, assistant professor in the School of Financial Planning at Texas Tech University, has found that stress can influence how we feel about our financial well-being as much as objective measures like the size of our savings account.

“It may be helpful to focus on the mental health side and remind people going through a financial shock that things are going to get better,” he says. “This is just a temporary hiccup.”