6 Practical Things You Can Do to Cope With a Financial Loss

By Myles Leva

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Last Updated: December 16, 2023

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Good personal finance practices require consistency and discipline. But what happens when a single, big loss throws your whole budget and future plans off balance?

Sometimes, even the most hardworking and financially organized people suffer major setbacks.

You can maintain a budget, invest, and live frugally for a long time and see everything unravel quickly. The thing is, apart from an emergency fund (which we highly recommend if you don’t have one already), there is little you can do to prepare for some financial disasters.

Unlike most of our content, coping with financial losses is a reactive topic. It’s one of reacting, often under enormous stress, to an event you didn’t plan for.

In this article, we will go over:

  • Some of the worst and most common causes of financial loss
  • Six ways you can cope with financial loss
  • Mental recovery

 

Financial Loss Examples

There have been several studies surrounding the causes of financial loss. One area where we have a lot of insights is in declarations of bankruptcy. The five most common causes are:

  1. Job loss
  2. Medical expenses
  3. Divorce
  4. Debt spiraling out of control
  5. Unexpected, uninsured events

The unpredictable nature of the above means that trends can change quickly. For example, medical expenses have been seen to reduce medical bankruptcies. But the American Journal of Public Health has found that they are still quite common.

Similarly, it’s often hard to place the cause of financial loss on one cause, as it can be a combination of any of the above.

Sometimes, luck just has it that someone will lose their job during a time when they were already struggling with debt.

Financial loss can look as simple as someone being fired while they’re living paycheck to paycheck. Or, they went through a natural disaster that their insurance won’t fully cover.

For example, hurricane coverage will normally include dwelling, personal property, and additional living expenses. But without flood insurance, many “hurricane” expenses won’t be covered. Being underinsured can be dangerous and cause significant financial loss.

Regardless, you can always check your insurance policies, work hard, and try to be a good contributor while paying your mortgage and not overspending.

But financial disasters can still happen, and it’s normally not possible to keep all of the above causes of financial hardship under control – that would be a lot to expect from anyone over the course of an entire lifetime.

 

 

How to Recover From a Big Financial Loss

So, if a big financial loss does occur, there are a few things you will want to do. The first is to stay calm.

 

1. Don’t Allow Impulses to Take Over

Under any form of extreme stress, a fight or flight response is an automatic, strong, emotional, and acute reaction. But it’s also a well-understood psychological response and one that you should not allow to influence your financial decisions.

This may seem like a strange and condescending place to start. But it’s critical to be aware of how your brain naturally responds to stress and not allow it to be overly influential.

Fight or flight impulses may be helpful in surviving the many threats of the wilderness, but you won’t want to react so quickly and instinctually in finance.

Examples such as pulling out your retirement fund, selling your house, and withdrawing other investments should be delayed until you’ve run through all your options.

So first, take the time to calm down, then run through all the potential courses of action you have and make a logical choice.

 

2. Reduce Expenses

There is one quick response to financial loss that does make a lot of sense.

Eliminating unnecessary expenses and sticking to only spending what you really need will at least partially help you account for the new gap in your budget. But while this is a common sense solution, you will want to be more thorough.

Here is a great article on reducing expenses and saving: How to Build a Debt Reduction Plan, Step by Step

 

3. Identify Poor Coping Strategies

Similar to our first point, you will want to understand all the negative forces that enter your mind under stress. This can include both inwardly and outwardly projected behaviors.

One of the most common responses to any kind of stress is suppression. Suppressing thoughts and feelings help you avoid confronting the unfortunate reality of your situation. But that reality exists either way.

So, the key here is to recognize and accept the situation for what it is and talk to your family, friends, colleagues, or whoever can offer genuine support.

Likewise, projection is a common coping response. Of course, it’s possible to place some level of blame on your boss if you recently lost your job. Or perhaps your family spent too much money before you entered your current situation.

But projecting the blame towards others is a response that mentally isolates you from your situation, making it as useless as suppression.

The key here, again, is:

  • to accept the situation for what it is
  • be truthful with yourself and others
  • and seek support where you can find it

There are other useless responses that can make you feel better but won’t solve the problem at hand. Denial is perhaps the worst, but other toxic responses yield similarly useless results. So, shift your thinking to the proactive responses.

 

4. Evaluate Your Present and Your Recent Past

It’s possible that others contributed to your current financial hardship.

But instead of thinking about that, look at every level of influence you’ve had on your own actions. Now is the time to find out how you got here. Not so you can shift blame or avoid handling your situation, but so you can avoid it in the future:

  • Did you trust the wrong people with your finances?
  • Did you take on debt irresponsibly?
  • Did you not object to big financial commitments made by family members when you could have?
  • Did you make risky investment decisions?
  • Did you not diversify your investment portfolio to offset risk?
  • Did you not diversify your portfolio?
  • Did you forgo on an insurance policy that would have saved you from much of your current trouble?
  • Did a slick salesperson get you to make an unwise decision?
  • Were you too prideful to realize your job was on the line?

This list of questions can go on and on. While these are hard things to admit, they are necessary questions if you want to get some closure and pave a better future for yourself.

 

5. Get Help

Be as open as possible with those close to you and ask for help from those who are willing and able to help you.

Avoid toxic friends and family, and focus on handling your current problems.

Getting professional help is also an option. You can find free support meant for people in your position. Non-profits like the National Foundation for Credit Counseling offer free budget and credit reviews, counseling for financial health, and negotiation with creditors.

 

6. If Necessary, Take a Loan or Declare Bankruptcy

Sometimes there isn’t an easy way out of financial hardship.

In these cases, you should avoid declaring bankruptcy as best you can. An unsecured personal line of credit can be a good tool for staying afloat and paying for what you need, if you have a path to use it responsibly while you do all of the above.

But when you’re in truly dire financial straights, sometimes declaring bankruptcy will be the only option.

In that case, make sure you understand the consequences and get the counseling you need to complete the process. It will be a long road to financial recovery if you declare bankruptcy, but if it’s the only option (and you’ve thoroughly explored your other options), then it can be seen as the last resort.

What Are Hardship Loans and How Do They Work?

 

 

Conclusions: How to Mentally Recover After a Financial Loss

Financial troubles affect good people and bad people alike. People slip from poverty to bankruptcy, and sometimes people who are financially well-off end up losing it all. But people do also bounce back, sometimes gloriously so.

The key is that as much as you may want to blame yourself or blame others, at some point blame becomes irrelevant. People make mistakes, and financial mistakes are far from the worst or least understandable mistakes people make.

Again, we can’t overstress the importance of asking for help when you need it. This is especially true if you have a history of mental illness.

If you are struggling with mental health challenges while handling financial loss, use the resources you can. Talk with the caring people in your life who are willing to help. If you are clinically ill, you can also consider claiming bankruptcy due to mental illness.

Probate and bankruptcy courts offer some help to people suffering from mental illness who need bankruptcy protection.

Photo by Andrea Piacquadio

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One comment on “6 Practical Things You Can Do to Cope With a Financial Loss”

  1. You left out the 3rd reaction to negative stress: FREEZING.
    This is often called OVERWHELM now. It is an physical and emotional process which can prevent thinking and caring about things for a while. When someone is in this state they can't make decisions easily. Or they do on autopilot when a new action is required.

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