Rebuilding Your Financial Foundation After A Major Life Change
Life can throw unexpected curveballs, but how we respond determines how we journey from setbacks to success. We can all expect to deal with major life changes that force us to remake our lives. Major life changes can have a traumatic and negative impact on our financial and emotional well-being. Rebuilding your financial foundation after major life changes often leaves people feeling emotionally drained and overwhelmed. But with the right instruction, inspiration, and motivation, you can be empowered to gain the strength, confidence, personal growth, direction, and resiliency you need for your financial transformation, and ultimately, your comeback.
Table of Contents
Rising From The Ashes After Major Life Changes: Financial Pain Points
10 Steps To Start Your Financial Comeback After Major Life Changes
The Bottom Line On Rebuilding Your Financial Life After Major Life Changes
Rising From The Ashes After Major Life Changes: Financial Pain Points
One of the main missions of Smart Money Changes Everything is to provide quality, comprehensive, and customizable financial education to individuals who are forced to start over again due to major life changes. Major life changes often result from traumatic loss, such as divorce, the death of a loved one, job loss, serious medical issues, or natural disasters.
My inspiration to serve people experiencing major life changes is my mother, who became a widow unexpectedly at age 55. Through her hard work, determination, resourcefulness, and self-education in personal finance, Mom was able to successfully remake her own financial life. Even though 35 years have passed, my mom's story still influences me today. Unfortunately, since then, I have witnessed family and friends in similar situations who have not been as successful as my mother in securing their financial future.
Recently, I was asked to design and deliver a financial education program for those experiencing major life changes, specifically divorce or widowhood. Before the design of the program, we surveyed to understand the participants' most pressing needs. From the survey, we were able to understand some of the financial pain points experienced by the participants.
Overcoming Financial Pain Points After Major Life Changes
We designed our program to incorporate relief and solutions for the pain points reported by the participants. Our goal was to design a program to deliver real-life money skills to enable the participants to take immediate action to relieve their financial pain points.
10 Steps To Start Your Financial Comeback After Major Life Changes
Understandably, you feel overwhelmed by the thought of having to rebuild your financial life. Rebuilding your financial foundation is crucial to securing your future. Follow these 10 steps to start your journey to rebuild your financial foundation after a major life change.
Step 1: Be Aware of Your Financial Mindset
Money and finances evoke many emotions under normal circumstances. Negative emotions such as stress and anxiety over money are compounded during a major life change.
Your mindset influences your emotions and financial behaviors. Ultimately, the intensity of emotions influences the decisions you make. By becoming aware of your current mindset and its potential negative impact on your finances, you can make an effort to reduce emotions to make more logical financial decisions.
Be aware of the many emotions you are experiencing during this difficult time. Stress, anxiety, grief, and unhealthy coping mechanisms are all possible reactions to your loss. Major life changes can give you a false sense of urgency. You need to slow down and take the time to evaluate all options when you are making important decisions. Common advice to people experiencing a major life change, such as suddenly becoming a widow, is to wait a year before making any significant decisions, such as a new living arrangement. When decisions need to be made, consult with a professional to guide you through the process so you don't make hasty decisions.
Step 2: Take Your Financial Selfie
I love to take pictures. By taking pictures you can freeze a moment in time to look back on in the future. In the 'olden' days, we referred to pictures as snapshots. Today, we take 'selfies' as we are the spotlight of the photo. What used to be referred to as taking a financial snapshot can also be updated to taking a financial selfie. Focus your lens on capturing your honest financial picture at this point for your financial selfie. Just like taking a picture, you will be capturing the critical elements of your finances at this point in time. From this picture, you will have a starting point to assess your financial strengths and weaknesses.
Your complete assessment should include lists of your:
Assets
Liabilities
Monthly income from all sources
Monthly expenses
From this financial snapshot, you can start to create a plan for your financial future.
Step 3: Set New Financial Goals
After you evaluate your financial snapshot, recognize that as your circumstances change, so must your financial goals change too. To move forward, you will need to adjust your goals to align with your new reality. Your new goals can include saving for future purchases or obligations, purchasing or renting a new home, or even improving your credit score. Take these steps to start setting new financial goals today:
Outline new short-term and long-term financial goals.
Prioritize these goals based on their importance to you and your future financial situation.
Make goals SMART - Specific, Measurable, Achievable, Relevant, and Time-Bound
Review and adjust - be flexible when circumstances change and priorities shift.
Step 4: Create A New Budget
Creating a realistic budget that reflects current and target levels of income, expenses, and savings is your roadmap to rebuilding your financial foundation. By creating a budget, you decide where your money is going. You allocate your income to cover your expenses, debt, and savings goals. The end goal of budgeting is ultimately saving money for your future. Keep these steps in mind while creating your budget:
After evaluating your financial snapshot, and setting new goals, prioritize your most important and fixed expenses, such as housing, food, and healthcare. Meet these basic needs first before you budget anything else.
Track your spending patterns.
Allocate funds to repay any outstanding debt.
The goal is to budget so precisely that you have money to save each month. When savings is prioritized as a non-negotiable part of your budget, you will succeed in reaching your savings goals.
Step 5: Identify And Reduce Expenses
An important part of budgeting is understanding where your money is going. Break down each of your expenses into fixed, periodic, or variable expense categories. Fixed expenses are the same amount each month. Examples of fixed expenses are rent, mortgage, loans, and memberships. Variable expenses are paid routinely, such as monthly, but are different amounts. The amount of variable expenses is usually under your control to some extent. Some examples of variable expenses include groceries, entertainment, and personal care.
Periodic expenses are paid on a schedule other than the usual monthly billing cycle. Examples of periodic expenses are annual expenses such as dues, car registrations, or other bills that come due at different times of the year. Each of these bills can be converted to a monthly amount so you save for them and aren't caught without the funds when the bill arrives.
Now that you have your expenses categorized, look at each expense to reduce it. For each expense, determine if you:
Need the expense
Can get a better deal by negotiation
Can transfer to a provider for a lower price
Step 6: Develop A Savings Plan
Developing a savings plan with consistent contributions plays a critical role in rebuilding your financial foundation. Even small amounts of savings accumulate over time to provide you with financial stability for your future. Take these steps to prioritize building your savings today:
Start an emergency fund as a cushion to absorb any unexpected financial curveballs life throws at you. Make your goal to set aside 3-6 months' worth of living expenses in a separate account that you don't touch for any non-emergency event. (A vacation is not an emergency.)
When you have fully funded your emergency fund, start regular contributions to a savings account. You may need to establish a system of automatic savings transfers from your paycheck or direct deposit account to your savings account to maintain discipline and consistency.
You can also set up special savings accounts to save for specific life-event goals, such as saving for a house downpayment. Break down long-term large goals into smaller steps to feel a sense of accomplishment as you make strides toward achieving your target savings goal.
Review and adjust your savings plan regularly.
Step 7: Establish Financial Management Systems
Money management doesn't have to be an overwhelming process. Financial management systems play an important role in helping to overcome the limitations that hold us back from reaching our financial goals. Financial management systems add consistency, structure, and discipline to goal achievement.
Automate savings and bill payments to stay consistent in meeting savings goals and reducing the risk of missed payment penalties and fees.
Start using budgeting apps and tools. Establish or increase the use of financial management systems, such as financial calendar reminders, and budget trackers, to stay on track to achieving their goals.
Step 8: Manage Debt
These steps will allow you to create a targeted plan to repay any outstanding debt:
Identify all outstanding debt amounts, listing them by interest rates and terms.
Create a repayment plan you can live with. Choose between the debt snowball method (paying off smaller debt amounts first to get motivated and momentum to pay off the rest) or the debt avalanche method ( paying off high-interest debts first).
Look into possibly reducing your interest rate by negotiating with your lender.
Factor the repayment plan into your budget.
Try this Debt Payoff Calculator from Calculator.com or this Debt Paydown Calculator from Bankrate.com.
Step 9: Update Your Estate Plan
Your current estate plan is likely not up-to-date. You will have to update your beneficiaries, appoint guardians for minor children, and revise your will, power of attorney, and any healthcare proxies.
This is a critical time to make these changes to ensure your wishes are carried out in the event of your death or health crisis by trusted individuals chosen by you. See an attorney who specializes in estate planning to assist you with these other appropriate changes for your unique situation.
Step 10: Seek Professional Financial Advice
Seeking professional financial advice can help you make the best-informed decision tailored specifically to your unique financial situation in the following ways:
Financial advisors will look at your entire financial picture and give you comprehensive solutions to rebuild your financial foundation after your significant life change.
Capable financial professionals on your financial advisory team, such as your financial planner, tax advisor, and insurance agent, can guide you to reduce your overall financial risk and safeguard your assets while growing your wealth.
In the process of transitioning your financial life after your significant life change, you may need to process transactions that have major tax implications. Financial advisors and tax experts can provide you with valuable tax-efficient strategies.
Turning The Page From Setback To Comeback
As shown in their self-reported financial pain points, the participants started the program with uncertainty, fear, and doubt in their ability to manage their finances after their major life changes. Their dedication and willingness to learn increased their financial knowledge, changed financial mindsets, and increased confidence in their financial capabilities. Most impressively, after the program, they took decisive action steps towards remaking their financial lives.
As their apprehension turned into empowerment, their hesitation turned into action, and their fear turned into increased strength, the participants set the foundation for their financial comeback.
The Bottom Line On Rebuilding Your Financial Life After Major Life Changes
Any major life changes can have a traumatic and negative impact on our financial and emotional well-being. Major life changes often result from traumatic loss, such as divorce, the death of a loved one, job loss, serious medical issues, or natural disasters.
With the right instruction, inspiration, and motivation, newly divorced and widowed individuals can be empowered to gain the strength, confidence, personal growth, direction, and resiliency they need for their financial transformation, and ultimately, their comeback.
You can turn the page from setback to comeback by focusing on these steps to rebuild your financial foundation:
Know that your emotions are running high now and be aware of your financial mindset.
Evaluate your financial situation right now by taking a financial snapshot.
Set new financial goals in alignment with your new financial reality.
Create a new budget.
Identify your expenses and try to reduce some expenses by calling up your providers for the best deal.
Develop a new savings plan, considering both short and long-term goals.
Overcome the limitations that keep you from achieving your goals by implementing financial management systems.
Manage your outstanding debt.
Check your current beneficiaries listed on your accounts and insurance. Update as needed, along with adjusting your estate plans.
Seek professional financial advice as needed. Don't overlook this suggestion just to save some money. The advice you receive may pay for itself over the long term.
Smart Money Changes Everything is strictly a financial education website. The information presented in this post is solely for your general financial education and is not to be considered financial advice. Always check with your trusted financial professional team who will consider your unique situation and goals to develop your own personalized comprehensive financial plan.
