Financial shocks come in many different 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 Lexington, Massachusetts. “They can be pretty big, even for a relatively well-off person.”
Turn to Your Emergency Fund or Start OneBetts recommends using an emergency fund as a first line of defense against financial shocks. “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 continues to grow.
If you don’t yet have an emergency fund, then experiencing 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.
Tailor Your Savings to Type of EmergencyMary Carlson, president of the Financial Behavior Keynote Group, a speaking, consulting, and teaching firm, 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 and a larger-than-expected tax bill.
Cut Back on Unnecessary ExpensesImmediately 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,” 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,” O’Neill says.
Ask About Hardship OptionsIf it’s still tough to pay your bills, 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.
Create a Timeline and Find SupportGiving 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, 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.
Don’t Forget Mental RecoveryResearch 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.”