How To Recover From A Financial Setback

“Experience is what you get when you don’t get what you want.”

That quote is attributed to Randy Pausch. I highly recommend his TED Talk that is referred to as The Last Lecture. Pausch, a college professor, gave the talk when he was dying of cancer.

I’ve always said that the number one personal trait that people need to have is resilience- and I found out why in the Spring of 2016. My hope for my three kids is that they are able to pick themselves up off the deck when they are floored by life. In Spring of 2016, my punch to the face had a financial impact. If you’ve faced (or are facing) a financial setback, I hope these thoughts help you.

What happened

I’m self-employed as an author, writer and video producer. I seek out work by making pitches, and I also respond to incoming requests for proposal. Somehow, the stars aligned and I got burned by doing a lot of work with poor clients. Here are some examples of what clients said- and what they really meant:

“I expect perfect grammar”: That means that I don’t value people and that their demands are completely unreasonable.

“We need a ton of work from you”: This means that they haven’t carefully though about the project and what quality work is required to complete it.

“I’m starting an online publication.” This person had no experience with anything close to starting or running a publication.

Not surprisingly, I did a lot of work for these types of people and either got paid late- or not at all. I lost thousands of dollars in income, and that was a real financial setback.

OK- enough whining. Let’s all learn from this situation.

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Step one: Move toward the problem

I’ve been married for 30 years, and it’s taken….well, about 30 years…to realize that I need to face problems head on with my wife. Invariably, when I confront a problem, it’s not nearly so dire.

In this case, I sat down with my wife, Patty. I told her how much revenue I had lost, and we planned our finances (as best we could) to cash flow ourselves without the income that was lost.

Now, that’s not easy for a couple, because one person has to give their partner bad news. Once the bad news is digested, the couple needs to put together a plan- and the plan needs to be put in place quickly, to avoid creating bigger financial problems.

This step is tough- but necessary.

Make sure you understand the root of the problem. Don’t assume the loss in business revenue was inevitable and that there was nothing you could have done to prevent it. Look at your processes and try to understand what went wrong. 

 

For instance, if you lost a contract with the government because of a lack of TS SCI security clearance, that’s very much your problem. Likewise, if a new technology came along and you spent too long adapting, it means you lost out to a change in the economy. 

Step two: Create a budget (if you haven’t already)

I’ve blogged about the need to create a monthly budget, and the benefits of sticking to a budget. Once the smoke clears from a financial setback, take another look at this issue.

If you have a budget, reassess your monthly budget and create a plan to fix the hole that was created by the financial setback. That may mean one or more of these steps:

• Cutting expenses: You may need to cut back on discretionary spending in your monthly budget. Maybe you dine out less for a few months, or you cut back on the cost of a vacation. Just be careful about the expenses you cut; the last thing you want to do is cut back on any savings plans, insurance policies, or your future retirement income. In fact, you can use this opportunity to think about annuity vs 401k and make sure you’re paying the correct amount in the right way.

 

• Consolidation loan: You may able to consolidate your credit card and student loan debts into one loan with a lower interest rate. If you take out a loan with a longer maturity date, however, you’ll pay more total interest over time. Say, for example, that you pay off debts with an average rate of 12% and replace them with a single loan at a 9% rate. Good for you- the rate is lower. However, if you may need to extend the maturity date to get a lower monthly payment, you may pay more interest than your old loan agreements.

 

• Increase your income: If you’re self-employed, you can find new business to replace the income you lost. That will take time- and you won’t be able to recoup that lost income for some time. You’ll probably need to cut expenses or renegotiate debts in the short term until the new business is billed.

Take a long look at each of these strategies.

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Step 3: Options you should avoid

A loss of income can be emotional, and it can be difficult to keep things in perspective. There are some actions to avoid:

• Doubt your abilities: Winston Churchill is quoted as saying: “Success is going from failure to failure without a loss of enthusiasm.” Everyone tries and fails- so don’t be too hard on yourself. If someone chooses not to act like a grownup, it’s out of your control. Don’t doubt your abilities.

 

• High interest loans: Taking out a high interest loan should only be a last resort- if you really can’t cash flow any other way.

 

• New credit cards: Same thing here. Many people take out a credit card as a short term fix, and then don’t pay it off. The best step is to avoid new credit cards altogether.

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Now you’re ready

There’s one bright spot when you have to address a financial setback: the next time it happens (and it will), you’ll be prepared. You’ll react with less emotion, and you can fix the problem faster. Try and build a savings balance over time, so that you’re prepared for the unexpected the next time it rolls around.

Give these ideas some thought, and work with your CPA and investment advisor on the details.

Ken Boyd

Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies

Co-Founder: accountinged.com

(email) ken@stltest.net

(website and blog) https://www.accountingaccidentally.com/

(you tube channel) kenboydstl

Image: Jason Bolonski, Frustration (CC By 2.0)