Rebuilding After a Financial Crisis

There are many things in life that can derail even the best money management plans. When a crisis happens, most people take things day by day just hoping to get by. When the dust settles, they're often left with a financial situation that is less than rosy. There are no savings to speak of. Their credit is shot, and there's debt that needs to be repaid. However, with hard work and dedication, a healthy financial future is possible.

How to Rebuild

The steps to recover after a financial crisis include budgeting, debt repayment, rebuilding credit, emergency savings, and replenishing retirement savings.

Budgeting

Budgeting simply means analyzing the money you have coming in; then developing a reasonable and goal-oriented plan for what goes out. The first step is to write a list of your current income and expenses. If you don't know exactly what you are spending, don't worry. Just write down an estimate for now. To get more accurate figures in the future, start tracking your expenses on a worksheet or spreadsheet.

Don't forget to list in your budget debt payments and money put aside for savings. For periodic expenses, such as vacation or birthdays, determine the annual amount and divide it by 12.

Though no two budgets are alike, there is a common rule. Expenses should never exceed income. If you are currently spending more than you earn, you should increase your income, reduce your expenses, or do both. Increasing income can be difficult, but most people have some expenses they can trim.

Take a look at how you spend your money and determine what is and isn't necessary. Write down your proposed changes in your budget and try to track your expenses on an ongoing basis to help you recognize when you've reached your limits. If you overspend once in a while, try not to get discouraged. No one is perfect. If it happens often, you may need to readjust your budget so that it's more realistic.

Debt Repayment

When a financial crisis hits, many people rely on credit to carry them through the storm. Eventually, they have to face repaying that debt. The first step in tackling debt is determining who and how much you owe. If you have a stack of unopened bills, take a deep breath and open them. If you don't have recent statements, call your creditors and ask them for up-to-date account information.

Next, create a plan of attack. How you do it depends on the status of your accounts. If you have accounts that you were able to keep current, they don't require any urgent action. Keep in mind that if you owe a significant amount and only make the minimum payments it could take years to pay off. This is why you should pay more than the minimum whenever possible. If you have multiple accounts, focus your extra payments on one creditor at a time. Many people like to start with the debt with the lowest balance because it can be paid off the soonest. However, you'll save the most money by starting with the account charging the highest interest rate. Once the first debt is paid off, put that money toward the next debt and so on until all the debts are paid off.

Rebuilding Credit

Your entire credit history is tracked by your credit report and ranked using a credit score. Information that appears on your report and affects your score includes your credit balances, past payment record and credit related legal activity such as foreclosures, repossessions, evictions, judgments, and bankruptcies.

When you apply for new credit, a creditor typically checks your credit report and/or score to determine whether or not to approve you and what interest rate to charge. Landlords and insurance companies also frequently check them, too.

As you can see, having a good credit report and score can make life a little easier. However, when people experience a financial crisis, they often do things that negatively impact them. You can't undo the past. After all, most negative information can stay on your credit report for seven years, but there are steps you can take to improve your credit report and score. These include paying on time, every time. Eliminating late payments will have a positive effect on your score.

Pay down existing debt, since a large debt load will lower your score. Explore ways to lower your interest rates and free up cash to make more than the minimum payments.

Avoid taking on additional debt, and dispute credit report errors. Review your credit report from each of the three credit bureaus: Equifax, Experian, and TransUnion. You can get a free copy of your credit report annually from www.AnnualCreditReport.com. If you see any errors, dispute them with the relevant bureaus.

Emergency Savings

You probably don't want to think about the troubles that could occur in the future, but unfortunately bad things can happen to good people more than once. One of the best things you can do to prepare for the unexpected is to save money. When you have savings, you don't have to put unexpected car repairs or medical bills on your credit card or worry about how you will pay your mortgage if you lose your job.

Financial experts recommend putting away at least three to six months' worth of living expenses in emergency savings. If you don't already have that amount, determine how much you can set aside each month until you reach your goal. Since you don't know when you may need the money, put it in an account that is easily accessible and where there are no penalties for early withdrawal. A savings account is usually a good choice. 

Replenishing Retirement Savings

People often turn to their retirement fund when faced with a financial crisis, either by withdrawing funds or stopping deposits into their retirement accounts. If retirement is several years or even decades away, it may seem easy to push it aside and focus on more immediate concerns, but saving for retirement isn't something that can be done overnight.

Borrowing or withdrawing against a retirement fund can cost you a significant amount of money in lost potential investment earnings. You can't un-borrow or un-withdraw the money, but you can focus on replenishing your retirement fund. If you stopped your contributions, restart them—even if you're paying back a loan. If you reduce them, bring them back up.

If you weren't contributing to begin with, now is the perfect time to start. Most employers offer a retirement plan, the most common one being a 401(k) plan. You can also contribute to a traditional or ROTH individual retirement account on your own. You may want to consult with a financial advisor if you're not sure how much you should be saving or what investment options you should choose.

Turning Your Finances Around is Within Reach

Remember, an unfavorable financial situation is not set in stone. You can gain control of your finances and pay all your bills on time, pay off your debt, have a good credit report and score, and save. It may take time and effort, but small, consistent steps can lead to big changes. By creating a realistic budget, tracking your expenses, and seeking professional advice when needed, you can work towards financial stability and ultimately secure a brighter financial future.