What happens to your investments and savings when you’re facing a catastrophic event beyond your control? This could be in the form of an economic downturn, medical emergency, or job loss or other career-related event. How do you survive and protect yourself during this situation? This post is in response to a reader question we received recently.
This is a complicated subject, so we’re going to take it in two parts. Here in PART I, we’re going to cover rebuilding your savings when a major expense hits. In PART II, we’ll take on rebuilding your savings in the aftermath of a career crisis.
“I would LOVE to read an in-depth article or series of articles that deal with how to rebuild your savings after a catastrophic event (or a series of events) wipes out your emergency and/or retirement savings. I have never read any articles that deal with the reality of people who had to use up all their don’t-touch funds to survive and real strategies on how to reestablish/build up these accounts again. Thanks.” — Ray H.
First, I’d like to thank the reader for posing this question. There are plenty of websites and blog posts that deal with how to manage and grow your money. There are far fewer offering advice on how to rebuild after a disaster completely wipes out your savings.
The entire discussion is a challenge, since no two personal financial situations are exactly alike, but we‘ll do our best with both posts.
What Major Expenses Were the Cause?
As much as we’d like to believe it’s possible to save up enough money or to have sufficient insurance to cover every potential disaster, life can still throw curveballs. So much depends upon what your personal circumstances are at the time a major expense hits, that you might not find it possible to protect yourself from every possibility.
And the possibilities are quite literally endless.
The first major expense that comes to mind is medical, and there’s good reason. Even though you may have medical insurance, there are always deductibles, co-insurance provisions, and uncovered costs. The situation is even more complicated if you’re hit by a major medical event at a time when you are between jobs and without medical insurance at all.
Another possible scenario would be a disaster to your home. For example, did you know your homeowner’s insurance policy does not cover floods and earthquakes? If you live in an area that’s prone to either disaster and you don’t have specific coverage, you’ll be completely unprotected if your home is destroyed by one.
Still another possibility is the care of an ailing family member. In some instances, it’s not just physical assistance you’re providing, but also financial support. If the person has serious medical issues and little or no income, you could end up spending tens of thousands of dollars in a short period of time, depleting your resources.
Here’s one more scenario none of us likes to think about: a lawsuit. It doesn’t matter if you’re right or wrong, it all comes down to what a jury is convinced to believe. If the amount of the suit against you exceeds your insurance coverage, you could come out of the case broke or worse.
There are many of scenarios that could wipe out your finances, and this is just a small sampling. Should such a disaster befall you, what can you do to rebuild your nest egg?
Step 1: Acknowledge the Reality of Your Situation
It’s easy to develop the deer-in-the-headlights syndrome when you’ve been hit by a serious crisis. But this is why it’s important to reflect on the reality of your situation and to create a plan to rebuild your life and your finances.
The cosmic reality of life is that, yes, bad things DO happen to good people, and while it may not be fair, there’s no choice but to deal with it.
You have to think in terms of starting your life over, at least the financial side of your life. If that’s the case, do your best to accept it and think of it as a “do over” in life. Most financial problems, after all, are temporary in nature.
Your goal will be to accept it, and make the situation as temporary as possible.
Step 2: Cut Way Back on Your Cost of Living
Whether your primary purpose is to rebuild your savings or to pay off lingering debt and then rebuild your savings, there’s no escaping the fact that you will have to lower your cost of living. The worst thing you can do is live in denial of the sacrifice that will be required in order to right your financial ship.
You’ll have to eliminate any expenses that are not absolutely necessary, and that may be just the start. Give serious consideration to selling some cherished possessions, particularly those that have debt attached to them. This can include one or more cars, a boat or RV, a vacation home, or under extreme circumstances, even the home you’re currently living in.
As extreme as this tactic sounds, it will actually provide you with three benefits that will help you on the road to financial recovery:
- It will lower your basic living expenses.
- It will eliminate debt (if one is attached to the possession).
- It will (hopefully) provide you with a much-needed lump sum of cash that could form the initial nest egg for your financial recovery.
I’m not making these suggestions lightly, but rather recognizing the reality that desperate times require desperate measures. If your situation is serious enough, you will have to keep all your options open.
Step 3: Start Saving Money as Soon as Possible
Ultimately, the key to long-term financial recovery will rest in your ability to save money quickly. The sooner you are able to begin doing that, the better everything will go.
Despite the fact that your overriding goal may be to get back to where you used to be, you have to recognize that your situation is different than it was in the past, and that will affect your savings priority.
For example, no matter how much you may want to rebuild your retirement savings, your first priority will need to be your emergency fund. Until you get it fully stocked with an adequate amount of cash, you will be living on the financial edge and highly vulnerable to additional disruptions. Filling that account should be your first priority.
Once that’s done, you can begin considering saving for longer-term needs. In this regard, you may want to split additional savings between long-term savings goals, like retirement, and intermediate goals, like replacing your car or putting a new roof on your house.
How much you will need to put into either will depend upon what your intermediate cash needs will be. If you think you’re at least a few years away from needing to replace your car or your roof, then you can certainly emphasize retirement savings.
However you prioritize it, just make sure your initial savings meet your most pressing needs.
Step 4: Determine if You Need Additional Income
Depending on what your immediate needs are and how quickly you’re able to rebuild your savings out of existing resources, you may need to give consideration to creating additional income. This may be particularly necessary if you also have debts that need to be repaid. You may need to increase your income, at least until you’re able to get the debt out of the way.
This can be accomplished by getting a part-time job, taking on side work, starting a side business, or by a nonworking spouse returning to the job market.
This may be a necessary step, because when you’re broke, you’re also very vulnerable. You’ll need to get out of that delicate state as soon as possible. That may require a combination of tactics, including lowering your cost of living, selling off high-cost assets, and earning additional income.
Step 5: Don’t Speculate With Your Savings
In order to rebuild your finances as quickly as possible, you may be tempted to take some of your savings and speculate with it. That might be putting money into high-risk/high-reward type investments, but this is a tactic you need to resist.
High-risk/high-reward investments can work out brilliantly when you’re coming from a position of financial strength. But when you’re financially weak, they have a high potential to wipe out what little capital you have available.
Avoid any type of speculative investing until you’re in a position where you’re financially strong enough to take losses. This is not a time for blind optimism, but for practical preparation. There will be plenty of time for more aggressive investing strategies later on, once your financial situation has improved.
Step 6: Be Patient
Though you may be anxious to get your finances back in order, it may take years before you are able to get your situation back to something close to what it used to be. You’ll need to be mentally and emotionally prepared for that effort.
Set up a plan that includes specific, concrete steps that will move you forward. Focus your efforts on achieving those steps, and do your best to block out “the way things used to be.”
Your financial situation will improve soon enough, but you have to give it the time it needs to happen.
Can you offer any other suggestions that will help a person rebuild their savings after a catastrophic event?