Life happens, and when you face something like a divorce, bankruptcy, unexpected emergency, or job loss, it can throw a wrench in financial stability, financial planning, and more.
If you find yourself in the position of starting over, it may feel overwhelming, but there are steps you can take to recreate a solid financial foundation that allows you to re-establish savings, protect retirement funds, and start your next chapter with the right foot forward. Read below to learn the basics of starting over financially.
Create Financial Goals
With a new situation, comes a new plan. When starting over, it’s essential to get a full picture of what your current financial snapshot looks like. Do you have debts to pay down? New expenses to take into consideration? Regardless of the changes, it’s important to understand where you stand and where you need to be.
That’s why the first step to starting over is to create new goals based on your new normal. Do you need to find a job? Restructure your budget? Focus on retirement savings? These are the questions you’ll need to answer as you create goals.
Budget, Budget, Budget
Once you set your goals, you will need to adjust your budget to accommodate them. Budget tools like the 50/30/20 rule serve as a guide for dividing income into three main categories: 50% for needs, 30% for wants and desires, and 20% for savings and debt payoff.
To use the rule, you will take your monthly income and divide your expenses into three categories so you can see where you may be undersaving or overspending. In a new financial situation, especially divorce or bankruptcy, you can expect to make some big changes to each category while you get back on your feet. That may include dining out less or putting more savings aside for an emergency fund. The changes will be dependent on your circumstances for starting over and your current income.
If you need to make cuts to your spending, the first thing to eliminate should be non-essential spending. This falls into the wants and desires category and includes things like vacation, subscription services (Netflix, Hulu, Spotify, DoorDash, gym memberships, etc.), and entertainment. While you should still budget for activities and outings, savings, debt payoff, and bills come first.
Read the Ultimate 5 Step Guide to Create a Monthly Budget for more details and utilize our budget sheets to help create your own.
If you’re starting over because of bankruptcy, rebuilding credit should be a big priority. Not only can it prevent you from getting a loan, but having a low credit score can result in extra fees and interest for the loans or credit cards you do have.
Because of that, rebuilding your credit score will need some extra attention. Review your loans and credit card terms to see which has the biggest debt and interest rate. Then, use the snowball method to pay them down from biggest to smallest. Eventually, you will reduce your debt while enhancing your credit score with on-time payments, and a lower debt-to-income ratio.
Increase Retirement Savings
In the case of a divorce or other major financial strain, you may find yourself with fewer retirement savings. If this is your situation, it’ll be important to rebuild your future nest egg quickly – and without hurting your budget in other areas.
To do this, assess where you stand today by using a retirement calculator to learn what your current retirement projections are. How much more do you need to have a stable retirement? How many more years will you need to work? Where can you make budget adjustments to make this happen?
Once you understand the need, there are a few different things you can do to help boost your retirement savings. If you haven’t already, make sure you’re enrolled in your employer’s 401(k) match program (if they have one). Many companies offer this benefit to incentivize employees to participate in the plan. It works by offering a percentage of matched funds to the employee’s annual contribution. For example, if you contribute 3% of your annual salary to your 401(k), your employer may also match 3%, meaning you’ll save 6% annually instead of 3%. If you’re not sure if this is part of your plan offering, check with your employer’s HR team or a benefits specialist. To learn more about match programs, click here.
In addition, you can open a Traditional or Roth IRA. These accounts are a great option to boost your savings because they are managed by an individual, not through an employer. While each account works a little differently, you can deposit up to $6,500 annually in additional retirement savings or $7,500 if you are age 50 or older (as of 2023). Learn about the differences between a Traditional and Roth IRA to determine which one may be better for your needs.
Regardless of the account option you choose, you should maximize contributions if your budget allows. This strategy will help you get back on track and help you solidify a strong financial foundation.
Establish or Enhance an Emergency Fund
Emergencies happen, which may be why you’re starting over financially. Maybe you have new medical expenses to account for or face fees for auto or home repairs. Either way, establishing or enhancing your existing emergency fund will help alleviate stress in the future if you find yourself in another emergency situation that creates a big financial setback.
Savings for an emergency fund can be budgeted for, and financial experts recommend having at least six months of expenses in the account, but more is better. This account should not be used unless you find yourself in an actual emergency, including vet care, funeral costs, job loss, or increased medical bills. Learn more about the fund and how to use it here.
Starting over financially can be overwhelming, but with the right strategies and tactics in place, you can re-establish your financial foundation and feel confident in the short- and long-term again. Utilize your resources and talk to a financial advisor if you need some guidance with getting started.