Slowly but surely, we seem to be rounding the corner from the worst of the pandemic in terms of the economy and the virus. But the events of 2020 have left a swath of devastation for many people financially. Through no fault of their own, millions of people saw a massive reduction in their work hours, lost their jobs, or lost their businesses.
We can do nothing to change what happened in 2020, but we can do things to mount a comeback. So let’s take a look at 5 steps to recover from financial disaster.
1. Assess the Damage
We know that burying your head in the sand doesn’t improve a bad situation, but sometimes it’s the only way we can protect ourselves from more stress and anxiety in the moment. If you spent the last several months not opening bills and late notices, now is the time to take a deep breath and do it.
It might be worse than you thought, or it might not be as bad as you feared, but go through everything and make a spreadsheet or list of what debts you have, how much you owe, how far behind on payments you are, and what the current monthly minimums for each are.
2. Triage the Damage
Make a priority list of what bills need to be paid immediately. If your utilities are about to be shut off or your house is about to be foreclosed on, those need to be addressed first. Call all of your creditors, even those you’ve kept current with. In most cases, if you call and explain the situation, creditors will work with you to create a payment plan that you can handle.
The bills you’re behind on can be put on an extended payment plan; those you’re current on may be able to give you a period of forbearance so you can focus on more urgent debts.
3. Set a Goal
Of course, the goal is to get out of debt and build back up or create an emergency fund, but you need to create a timeline to measure your progress. Make the timeline realistic. You probably can’t get back to where you were before financial disaster struck in a month, but you want to push yourself too, so don’t give yourself a goal date that is too far away either.
4. Create an Action Plan
Now it’s time to start the recovery process.
Create a Budget
The first step of your action plan is to create a budget if you weren’t already using one. A budget tells you how much money is coming in, how much is going out, and where it’s going. Critical information if you want to recover from financial disaster.
Get Everyone on Board
Get everyone in the family on board with the plan. An action plan only works if everyone is working together. You and your spouse have to agree to work the plan together, or it won’t work. If you have kids, you probably haven’t told them everything about the current financial situation. And that’s fine. It’s not their job to worry about money. But they’ve likely picked up on what’s happening, and having no explanation at all is scarier than knowing what’s happening.
Keep it short and straightforward. Explain that while you have money to pay for essentials, some extras they might have had in the past might be in short supply for a while until things get back to normal.
Cust Expenses, Make Extra Money
If you’re reading this, I’ll assume you’ve already cut many expenses to the bone and are doing what you can to bring in extra money, so I won’t belabor those things. If you haven’t, you must have been charging unnecessary expenses on credit cards, and that needs to stop.
Make Your Debt Cheaper
Lower the cost of debt where you can. If you have student loan debt, you may be able to refinance to a lower interest rate. Keep in mind that if you refinance federal student loan debt, you lose access to the many repayment options those loans offer.
If your credit score is good enough, you may qualify for a balance transfer credit card or a personal loan to eliminate or reduce your interest rates on those debts.
You may be able to refinance your mortgage and pull out some cash to deal with your other debts.
Preventing Round Two
2020 was tough on everyone, and even some of those who had done everything right suffered significant financial setbacks. But I hope that we all learned some lessons and can take steps to prevent the next financial disaster. I wrote a companion piece to this article detailing how we can all be better prepared to weather the next financial crisis, be it from another pandemic or something else.
Here’s to a better year for us all.
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