There are times in your life when you think you can do no wrong financially. You consistently hit your financial goals and don’t have surprise life events.
Your net worth keeps climbing, you have a reasonable savings rate, and you’ve found your optimal balance between being a cheapskate and a big money spender.
I was there personally, and oh man, did it feel good. However, just as you can’t expect beautiful sunny days all the time (especially in Chicago), you also cannot expect to hit higher highs constantly.
The Bad News
There are events out there that can significantly alter your spending habits. I will make a list of these but not list everything because that would be way too depressing.
- Death of family members
- Divorce or breakup
- Job or income loss
- Major house or car maintenance
- Major injury
- Market crashes during retirement
Why is all this depressing stuff even on my mind? Well, I recently went through one of these by going through a breakup with my ex, whom I had been dating for five years. We had even moved in together and everything. Ouch!
So what do we do when we face one of these situations? I’ll talk about how we can piece our lives together on the financial side, having gone through this recently.
Handling the Initial Shock From Life Events
The scariest time in the whole process of managing change is right at the beginning of it. You are dealing with a lot of shock, volatile emotions, and intense “why me” thoughts. So in this stage, it’s about survival and limiting big decision-making as much as possible.
During this, you may need to tap into emergency funds, and if you’re anything like me, it’ll feel like you’re committing a cardinal sin. It’s not! This is the entire purpose of your emergency fund, and you have permission to use it. Just make sure you’re still using some conservatism around your spending.
During this time, there are many costs you can spend on using your emergency fund. These costs range from hotel stays, furniture, and attorney fees to funeral expenses, hospital bills, and a new roof on your house.
Having an emergency fund follows Ben Graham’s principles of having a margin of safety, but now it’s time to eat into your margins.
Additionally, it’s important to remember that your mental and physical well-being is more important than money. During this beginning stage, it’s essential to lean on friends & family, meditate, journal, exercise, eat well, and/or go to therapy.
Early Transition to a New Life
After a while, some of the initial shocks wear off, and you’re more emotionally stable. This stage is where you do some of the planning that you were able to put off initially.
Planning your personal and financial life can be stressful, but it has to be done sometime. Ironically, a plan undoes much of the stress from the surprise life event.
You want to take inventory of your life situation and think about any adjustments that will be needed. On the personal side, this can include thinking about buying a new house, the type of jobs to apply for, etc. For me, this even included changing cities to be closer to friends and family.
Financially, taking inventory would mean making a new budget that reflects the change and prioritizes spending.
If your life event includes receiving an inheritance or insurance windfall, you also need to think through capital allocation decisions. Depending on your comfort in making financial decisions, hiring a financial advisor may be required.
Life Beyond the Surprise Life Events
Eventually, you fully accept what has happened as part of the last stage of grief. So now it’s all about executing what you were planning.
This includes tracking your spending to make sure it matches your budget. You’d look to rebuild your emergency savings account if you depleted any of it.
Also, you’d make the personal life changes that you set out to do. You’re actually doing the house shopping, interviewing for jobs, and changing of cities.
Hopefully, here you’d start hitting all of your financial goals again. However, what’s most important is you’re back in a good mental, physical, and emotional health space.