How to Overcome a Financial Setback

For instance, my cousin Rohit was doing well financially until the pandemic happened and he was hit with a 50% salary cut. He is married and they were expecting a baby, his wife was soon to be due for their child's delivery.

Rohit realized that it would be financially difficult for him and he gave me a call asking for a solution. He said "I won't be able to manage the household expenses, credit card bills, housing loan EMI, and medical expenses with the deduction in my salary" and began to panic saying "shall I redeem from my investments or sell off my car or take an emergency loan".

To which I responded, "Rohit, you need to stay calm first for us to figure out a solution" I explained him that there is no point in redeeming his investment as markets were at all-time low (in March 2020) and opting for an emergency loan will only add to his existing debt creating a debt burden for him.

I gave him a suggestion to withdraw his emergency fund that he had maintained and about which he had forgotten in panic mode. But, the contingency fund had an amount only to manage for next 3 months and it could cover the maternity expenses. So I advised him to start budgeting and cut few expenses in the coming months to save an amount. This financial instability did affect the family's mental health and physical health; his mother suffered an anxiety attack due to financial stress but thankfully had adequate health insurance cover.

As Rohit faced this financial setback, eventually his mother and wife started a tiffin service to support the expenses. This gave Rohit's family an additional source of income. Taking my advice, he tried to reduce his excess debt obligations and was aiming now to overcome the financial setback.

Rohit asked me to guide him on how to overcome the financial setback, and I enlightened him with the fundamentals of financial planning for a financial recovery. These points may help you overcome and prepare for any financial setback life brings up.

1. Reset your budget

For some of you, keeping up with the daily expenses and managing the debt is challenging enough; hence, investing for the future may seem out of reach. However, the ones who can stick to their budget and begin saving and investing on regular basis will manage to stay afloat during a crisis.

Whether you have experienced a setback in your personal or business finances, the first step is to re-evaluate your existing budget and assess your assets and resources.

For instance, if you have faced a job loss or salary cut, look at the expenditure, savings, assets, or a secondary source of income to create a new budget and hanker down until you find a new job.

If you are a business owner, you may need to recalculate the operating expenses and costs. Look at how you can cope with the shrinking revenue stream by cutting costs, lower outgoings, and create new ways to provide services.

List down your cash flows and try to evaluate how much you will need to meet your regular bill obligations and how much you can realistically allocate towards saving and investment into SIP or other investment avenues.

With this budgeting exercise, commit to not spending more than 40% of your earnings. This will enable you to build an emergency fund to cope with any unforeseen crisis.

As the saying goes, "Hope for the best, but prepare for the worst"

This change may be difficult but reining in your spending and creating a contingency fund will ensure your financial stability for future.

2. Define your goals

The second step in your financial recovery is to define your objective or goal. Your goal setting exercise should be initiated by involving your family, as most of your financial goals are likely to be personal/family-oriented.

The best financial goals are S.M.A.R.T and includes an emergency fund that holds at least 12 to 24 months of regular expenses plus loan EMIs and an insurance cover. If you are suddenly faced with any financial setback, this will become your financial safety net.

After you have analysed your current financial situation and what income sources you have available, you can easily set your financial goals for the future.

As a family or enterprise, you need to work together as a team to budget, create additional sources of income, set goals and cut expenses to get through the financial setback. You may also remould your previous financial goals to reflect reality and align with the current financial situation.

3. Reduce your debt obligations

If you're already in debt with high interest or burdened with a substantial due to clear, try to contact your creditors to work out repayment options and/or try to negotiate for lower interest rates. Curb spending habits that could create more debt. Though this alone will not get you out of debt, but at least you will cease the possibility of additional debt obligations.

Next step is to look at the existing debt and pay off the highest possible amount. This could be from your additional source of income; generally, this will be higher than your minimum due payment or existing EMI.

This way you could pay off your biggest debt burden off faster and start to save more. Reducing your debt obligations will improve your credit score and increase your chances of applying for a personal, car, or home loan in the future if need be.

Essentially, you need to maintain an optimal debt-to-income ratio on your journey to financial recovery by reducing expenses and existing debts.

Having a debt is not necessarily a financial faux pas, as long as you can repay and clear dues on time. To ensure that the debt obligation does not increase into a debt burden that leads to a debt trap, avoid taking any payday loans and make minimal utilization of your credit cards (they charge high interest rates). On a cautionary note, failing to avoid this step can be disastrous for your financial wellbeing.

4. Financial plan for future

Now that you have your goals set for financial recovery and you have assessed your current financial situation, it is time to construct a robust financial plan to bridge the gap between your current financial situation and financial recovery.

Although you may not be able to eliminate the possibility of a financial setback, it is possible to mitigate the extent of its impact. To create an efficient financial plan, consider a regular saving amount and the various investment options vide the systematic investment plan (SIP) mode, such as mutual funds, PPF, NSC, FDs, tax-saving schemes available. You can invest as little as Rs 500 in suitable schemes that will enable you to achieve your S.M.A.R.T. financial goals.

It takes meticulous effort and patience to stick with the plan for a financial recovery and to minimise the chances of facing any financial difficulties in the future. Nothing will change until you take corrective action today and chart your roadmap to financial recovery and eventually financial independence.

5. Consult a financial professional for help

Many may not be equipped to handle financial setbacks from a financial literacy perspective. This is where a professional financial advisor can provide unbiased guidance to enable your financial recovery. If you find overcoming the current financial setback a daunting task, consider some professional help through a financial advisor or planner.

A financial planner will aim to help you overcome a financial setback and get your finances back on track. The financial planner will work out a budget based on your income and expenses and draw up plan to improve your financial health for the future. Next, rebalance your investment portfolio and align it with your new financial objective and investment horizon.

Besides this, your financial advisor could help you navigate through major financial dilemmas and the decision-making process. They can help you with aligning investments to your financial goals and provide options that are tax-efficient. To recover from a financial setback could be difficult as an individual but with some professional guidance you can survive the difficult times.

With the help of these fundamentals, Rohit has now achieved financial recovery after 6 months. It takes time for every individual depending on various factors like economic changes, market volatility affecting your investments, family requirements etc. Meanwhile, he got a new job with salary hike and now is focusing on brighter financial future.

If and when financial setbacks inevitably do happen, you may believe your situation is unique, but many have walked this path before you and managed financial recovery. You can too.

To conclude...

Notably, financial setbacks can occur due to our own actions or inactions as well, such as procrastination in saving, splurging on new fancy things to maintain certain lifestyle, stacking up credit card bills, over borrowing and creating a debt burden and lack of budgeting and money management skills etc. All these aspects can lead to financial distress.

As a part of the process of overcoming financial setback, you must avoid repeating such mistakes with your finances for a healthier financial future. Very often you tend to neglect small things like unwanted expenses, frequent use of credit cards, not saving on regular basis, and over borrowing etc. Such small mistakes pile on and reflect as financial setback, it is important to fix small leaks to prevent the ship from sinking later.

Remember that the key to financial recovery is to take care of your mental and physical health. You must recognise that a financial setback disturbs yours and your family's mental health as much as your financial health. Try to keep calm and surround yourself with the right positive environment that gives you a better perspective on how to overcome financial setbacks.

You see, it is mainly about empowering yourself with the weapon of financial knowledge, as understanding the nitty-gritty of financial planning, being able to decide between what is beneficial or detrimental to your financial health can help you become your own financial planner.

Many of you may rely on your financial advisors for guidance towards your financial recovery, but with adequate financial knowledge, you could become a 'Financial Guardian' and make informed financial decisions for yourself and your family.

And in case you are wondering how you could be a financial guardian for your family, PersonalFN's latest special initiative, the "Certified Family Guardian", offers you an exclusive opportunity to learn the finer nuances of financial planning.

Organised into eight modules with 24 extensive videos, the "Certified Family Guardian" will help you with all the relevant tools and learning modules needed to get better at money management and making informed financial decisions for your family's secure future.

It also offers a host of other benefits to help you make informed investment decisions. Read here for complete details.

So, if you wish to achieve financial recovery and become a financial planner for yourself and your family, enrol for "Certified Family Guardian" course today!

Warm Regards,
Mitali Dhoke
Jr. Research Analyst

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