You’ve finally done it. You’ve committed to making some big financial changes in your life. You’re going to plow through your worst debts, build up an emergency fund, and start saving for retirement.
At first, everything’s going wonderfully. You sell off a bunch of stuff on Craigslist and wipe out a few really bad debts. You put some money in your savings account for emergencies. You’re taking big whacks out of your highest interest rate debt. You’re spending less than before, too. You can really see the progress.
Then, it happens.
“It” can be any number of things. It might be a job loss. It might be an unexpected pregnancy. It might be an illness of a family member. It might be a car breakdown. It might be a family emergency. It might be a broken-down washing machine. It might be a flood.
Whatever “it” happens to be, your financial plans are disrupted. Some big unexpected event has just siphoned off most of your gains. Your emergency fund is gone. You may have thrown more money back onto your credit cards.
You look at your finances and… you’re back to square one, or close to it.
It’s disheartening. It makes you feel like you’re never getting out of this hole. It can definitely make you want to quit the whole financial progress thing entirely.
Before you do that, though, let me just offer a few words of advice.
First of all, this disaster would have likely happened anyway, regardless of your financial choices. Your financial decisions did not cause this disaster. This disaster is just part of life. Sometimes, life happens to us. It’s not fair. It’s not fun. It happens. Don’t try to tie together this disaster with your financial moves. You would be surprised how often that happens, and it’s absolutely the wrong takeaway message.
Second, imagine how this disaster would have impacted your life had you been doing nothing financially over the last few weeks/months/years. Imagine you hadn’t sold some stuff on Craigslist. Imagine you hadn’t paid off some debt. Imagine you hadn’t spent a little (or a lot) less in the recent past.
What kind of smoking crater of a disaster would your life look like now if you hadn’t made those moves?
Likely, because of the moves you made, you were able to deal with this crisis with much lower stress than you otherwise would have. You were able to deal with the broken-down car. You were able to deal with the family emergency. You were able to quickly replace that broken-down dryer. You had the resources in hand to deal with those things.
Without your recent financial moves… would you have been able to handle it at all? Maybe. It probably would have involved digging a bigger debt hole. It might have involved borrowing money from family. It might have involved a really badly kludged solution to the problem.
In other words, without your good moves prior to this disaster, this disaster would have been far worse.
Want to know a secret? That’s one of the best reasons to be financially responsible. It takes those crisis moments and eliminates the financial stress from them. You don’t have to worry about an unexpected car repair – sure, it’s a bummer, but you can just handle it. You don’t have to juggle accounts. You don’t have to write a check that might bounce. You don’t have to make panicked calls. You don’t have to get emergency loans. You just handle it. Sure, you wind up with a bit less money in your pocket, but there’s no additional stress involved.
The simple truth is this: given that this disaster was likely going to happen regardless of your financial moves, your life is substantially better now because you made those moves. Your financial moves have already improved your life by making this disaster much more tolerable! Rather than being frustrated by your lack of progress, you should embrace it and compare it to where you would have been had you not been making these moves and then had to deal with this emergency.
The next step, of course, is getting back on the saddle.
The recipe here is honestly much the same as it was when you were first turning things around. You want to have an emergency fund in place – some cash in your savings account, ideally enough to cover a month or so of bare-bones living expenses. After that, you want to start cutting away at your debt, especially anything that has double-digit interest rates. If you don’t have any high interest debt, keep cutting at that debt, but also start saving for other major goals like retirement.
Here’s a refresher course.
Spend less than you earn.
This is the absolute, most fundamental piece of the puzzle. If you’re not spending less than you earn, nothing else listed below works. (Ignore costs associated with the emergency when considering this.)
In a typical pay period, you need to wind up with more money in your checking account at the end than when you started. If you’re struggling to do that, evaluate your expenses.
Food is a great place to start – just eat more at home, buy more store brands, and have more low-cost meals. Meals like scrambled eggs and toast, beans and rice, stir fry, soup and sandwiches, and many others are extremely cheap.
Consider your cable bill and whether or not you can cut some channels from it (or scrap it entirely). Put a cap on your “fun” spending each month. If you buy a lot of stuff online, delete your credit card numbers from those sites. Those are immediate steps you can take, but they just scratch the surface.
Build an emergency fund.
After an emergency, you’ve likely depleted your emergency fund, so in the short term, focus on building it back up. I usually recommend shooting for a single month of bare-bones living expenses – just enough to cover the bills and keep lentils on the table.
I also recommend automating this and never turning it off. Instruct your bank to transfer a small amount each week from your checking into your emergency fund. If you don’t have an emergency fund, one great way to do it is to sign up with an online bank like Ally Bank or CapitalOne 360, link the account with your current checking account, and set up a small automatic weekly transfer. That way, if you do deplete your emergency fund, you’ll automatically start refilling it, and it keeps filling and filling during calm periods so you can eventually handle all kinds of emergencies.
Tackle high-interest debt.
In an emergency, you may have thrown a big expense onto a credit card or taken out a high-interest, short-term loan. Get rid of anything that’s exceptionally high-interest first – anything over, say, 30% – and then stock your emergency fund as described above.
Once you have your emergency fund going, start drilling down through everything that has double-digit interest rates – your credit cards, mostly, though some dodgy car loans and student loans might be that high – and pay them off in order starting with the highest interest rate. Do everything you can to make extra payments on that highest interest rate debt.
Save for retirement and other goals.
If you’ve knocked down your high-interest debt, start saving for retirement. The only exception to that rule is if your employer offers matching funds on your retirement savings, in which case you really should be contributing enough to get every dime of matching money because that’s effectively part of your salary that you’re missing if you don’t collect it.
If you’re unsure as to how to save for retirement, the easiest method is to just sign up with your retirement plan at work and choose a “target-date retirement fund” that matches a year close to when you will retire. That will usually be a solid choice for almost everyone.
You may have other goals, such as a house down payment. For those, an automatic savings plan, much like what’s described above in the section about emergency funds, is perfect. Just open up a savings account somewhere and automate the savings.
What if emergency strikes again?
If it does, follow all of these steps again. Remind yourself that you’re in far better shape than you would have been without taking positive steps and then get right back on the saddle by working on replenishing your emergency fund first and then moving right back into debt repayment.
A setback isn’t the end of the world. In fact, your ease of handling a setback is a sign that your financial progress is working. Just pick yourself off and step right back on the path.