How to Prepare and Recover from Financial Setbacks

Learning from past financial setbacks is a tried and proven method to build a Better Future. An Ameriprise Financial study found that 75% of American experience at least one major financial setback in their lifetime.

This often come at a cost of more than $50,000.

For 42% of Americans, the first financial mistake starts at college with unnecessary expenditures, credit card debt and student loans. We sign up early and get roped into a lifestyle of debt. Prior to the pandemic, many were on track to default on their student loans.

So much so that one out of every ten Americans has defaulted on a student loan. An average of 15% of student loans are in default at any given time. If it wasn’t for the aforementioned pandemic pause and the recently announced Student Loan Debt Cancellation of 2022, defaults would be worse.

In the end you can break the cycle. Here’s are some simple solutions.

Table of Contents

Ramp Up Paying Off Debt – “the Math ain’t Mathing”

When you’re drowning in a pool of subscription, ride shares and debt, it’s challenging to see the upsides. However, in the game of wealth, it comes down to choices.

Shift your money mindset

The secret to a successful diet is not dieting at all. Being health is a lifestyle change. A holistic approach is the only way you can truly see progress, the same goes for finances. The game is played in our heads.

I made for a terrible college student. Apart from having a Marine’s death wish, I barely paid attention to school or the debt that was pilling up. While I left undergrad with around $35,000 in debt, I added an extra $80,000 from grad school.

Worst yet, I didn’t even graduate. I’m not even alone in this plight.

An estimated 38.6% of the 43 million student debtors in the United States — roughly 16.6 million people — have debt but no degree six years after first entering college, according to National Center for Education Statistics (NCES) data analyzed by the Hope Center’s Mark Huelsman.

I ended up starting from the absolute bottom with a job making $23,000 per year. Owing and living pay check to paycheck was startling. There comes a time when you can’t blame anyone else anymore. I needed to change fast.

Write Your Goals and Draft Your Financial Plan

Below are three approaches to paying off debt:

Avalanche – Making your minimum payments and then tackling the debt with the highest interest rate first. This mathematically makes the most sense as you’ll pay less overall when targeting the higher interest rate debts.
Snowball – The most popular one on social media. Paying your debts in order of smallest to largest. Why? You gain momentum when you complete paying off the remaining balance. It offers psychological wins to build your confidence.
Blizzard or Flurry Method. This is where you start off with the Avalanche approach and sprinkle in some quick wins when smaller debts are either at $500, $1,000 or $2,500.

What’s the best method? It’s the one that works for you.

The avalanche method is better since it often requires less time and also you pay way less in interest on most occasions. For me, I use the blizzard approach since I like the kinetic energy around managing my cash flow.

While the debt snowball is the most popular, I would like you to consider your Wealth Snowball as well. It can work the same way.

Plan your career trajectory

Watch it, the first step is a low paying entry-level job.

For most people landing that coveted high powered director position out of college, doesn’t quite work out. You are more likely to land a job with less zeros while paying way more expenses than you think. American workers expect more money.

How much more money?

Well a new labor market survey from the Federal Reserve Bank of New York suggests the average reservation wage — the lowest wage respondents would be willing to accept for a new job — increased in the past year to $73,283 as of March 2022.

Instead of focusing on a desired dollar amount remember to gain valuable experience and transition as much as possible in the beginning. If you don’t get promoted in at least two years, start looking for a great exist. Job-hoppers are snagging 30% raises.

Job stayers increased their wages by about 4.7% as of June 2022, while switchers raised theirs by 6.4%.

Traditional thinking is overrated. Don’t waste strong earning potential, pivot when necessary.

I went from making $23k to $32k in six months and another $64k in a year. That’s a 119% annual increase. In under five years, I was making six figures. It might not be Silicon Valley money, it’s still beyond my expectations.

Don’t think about entry level job as setbacks, think of these as set ups.

Work SMART+ER, Not Harder

Stay a head of the curve by implementing a S.M.A.R.T. approach to your personal finances. Keep your goal specific, measurable, attainable, related to your overall objective in life, and time based.

And don’t neglect adding an Emergency Strategy into your vocabulary and robust Retirement plan.

You can’t afford to buy a house until you start planning

According to the Statista Research Department, the homeownership rate among Americans under 35 years was 37.8 percent in the second quarter of 2021. The average house price has been rising rapidly nationwide. According to the Federal Reserve Bank of St. Louis, the median home sales price is $428,700.

That’s an increase of $58,900 from just a year ago. If you want to buy a home, best get to it. It’s not slated to be cheaper. The best way to do so if to go the affordable route.

No more than 25% of your after tax take home pay should go towards your total housing cost.

It’s time to Grow Up and Make Seismic changes

In order to win at wealth, I took any opportunity that came by. Like a door swinging open, I moved from Florida to DC when a job opportunity came. I didn’t need to have family and friends in the area. All I needed was a job.

It’s this kind of seismic change that can undo past financial setbacks. You have to be willing to make a truly lifestyle change. This includes leaving your creature comforts.

I found that most of these moves, require at least $5k. Don’t be surprise if you end up sleeping on an inflatable bed for a while.

The most significant ways to tweak your path to a home:

Move for more money
Cash flow rules everything. Money management should be your goal.
Applying for a higher paying jobs and ask for relocation fees (if any)
Pay down your consumer debts and Invest in retirement assets to build your overall wealth
Saving for a down payment or use creative financing using your IRA
Starting to look for something in your price range

Become a homeowner sooner than later

Social media might tell you that owning if not for everyone. Just remember most of them are owners themselves. As such don’t overdo it on trying to get a home to please others. Get a home that efficient for you.

This won’t be your final home.

Avoid this massive setback to achieve more with your money. It’s way better than throwing it at rent.

Stop comparing yourself to other “successful” people

Social media is making it harder for people to find joy and gratitude in their life. Break the jealousy cycle continues by limiting the noise. Cut off toxic friends and family, if you need to. Or if you are the toxic one, cut yourself off so you can do some healing.

Emotionally healthy people confront life’s challenges and setbacks differently. You owe it to yourself. Focus on being the best version of yourself.

Beating Setbacks is easy than advertised

Here’s a quick recap on how to recover from the biggest financial setbacks:

Inventory your life plan and trajectory
Build up your momentum to pay off debt quickly
Invest and save often to beat inflation
Plan your career trajectory while not forgetting to job hop
Become a homeowner, and
Stop the social media noise

Disclosure: This post is brought to you by the Neighborhood Finance Guy. We highlight financial literacy information, resources, and more on your way to money management goals and personal wealth. Our goal is to help you make S.M.A.R.T.ER decisions with our money. We do not give investment advice or encourage you to adopt a certain investment strategy. Your personal finance is up to you. If you take action based on one of our recommendations, we don’t earn a dime as of 8.2022. We operate independently.

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