5 Steps to Help Overcome a Financial Setback
Financial setbacks can happen at any time. Whether it’s an unexpected bill or a job loss, it’s important to have a plan for getting back on track. Watch as personal finance author Stefanie O’Connell explains five steps to help overcome a financial setback.
STEFANIE: At some point or another we’ve all faced an unexpected setback — a job loss, an injury or an urgent last-minute trip to care for a sick relative.
STEFANIE: Big or small, these kinds of events have the potential to derail even our best-laid financial plans. But these setbacks don’t have to last forever.
STEFANIE: I’m personal finance author Stefanie O’Connell, from stefanieoconnell.com, here to share five strategies for overcoming a financial setback.
STEFANIE: So that whatever comes your way, you can get back on track as soon as possible.
STEFANIE: Step 1: Estimate the Total Cost of Your Financial Setback
STEFANIE: For example, if you had an injury, estimate the total out-of-pocket cost of your medical care plus any wages lost during your recovery process.
STEFANIE: Or, if you lost your job, you might estimate that you need around six months to find a new one, so you would estimate the total of your basic cost of living for six months.
STEFANIE: While you may not be able to predict these costs to the penny, getting a clear idea of what financial resources you need to support you through your setback is the first step in creating a plan of action for getting back on track.
STEFANIE: Step 2: Cut Costs Where You Can
STEFANIE: Are there any ways you can reduce your estimated costs or even temporarily lower your essential cost of living?
STEFANIE: Cutting costs in the short term may help reduce the amount you need to get back on track financially for the long term.
STEFANIE: So, for example, if you’ve lost your job consider staying with family while you’re looking for work or downsize your current place to help reduce your rental costs.
STEFANIE: These alternatives may help reduce the immediate impact on your financial life, giving you more time to save up for future financial demands.
STEFANIE: Step 3: Consider Your Options
STEFANIE: That is, start identifying where you’re going to get the money to cover the estimated cost of your setback.
STEFANIE: Do you have enough money in savings to cover your projected costs? Do you need to rely on a credit card or a personal loan? Can you borrow money from friends or family?
STEFANIE: As you consider your financing options, be sure to weigh the pros and cons of each before deciding on which will best suit your particular needs and circumstances.
STEFANIE: Step 4: Map Out a Plan for Getting Back On Track
STEFANIE: For example, if you used your emergency savings, a loan from a friend and a credit card to cover the cost of your setback, decide how and when will you begin the process of repayment. Will you rebuild your savings first? Will you pay back your debt first? If so, which debt?
STEFANIE: What specific financial changes are you going to make to prioritize this repayment? Are there any things you need to do, expenses you need to reconsider or plans you need to cancel to implement these changes? How much will these changes free up your budget and how soon will you be able to start and complete the repayment process?
STEFANIE: In addition to temporary cutbacks to your budget, you can also look for ways to bring in extra money to help expedite your financial recovery. These don’t need to be permanent commitments, but the more extra income and temporary cutbacks you’re willing to make, the sooner you can get back to financial health.
STEFANIE: Step 5: Build or Rebuild Your Emergency Savings for the Future
STEFANIE: Financial setbacks happen to all of us. It’s not a matter of if, but when they’ll hit.
STEFANIE: The more prepared we are to handle those inevitable setbacks, the faster we can get back on track, and begin rebuilding our lives and our futures on our terms.
STEFANIE: So, dedicate a savings account specifically for these kinds of unexpected financial setbacks and build it up with three to six months worth of living expenses to serve as your financial safety net when you need it next.
STEFANIE: For more tips on how to take control of your financial life, visit allstate.com/blog and follow me @stefanieoconnel.