On this site, I talk a lot about money milestones and achieving various financial goals. From building up an emergency fund to saving for retirement, these are all worthwhile and important topics that can make a huge difference in one’s fiscal life. However, I recently realized that, while I’ve spoken a lot about setting a path for accomplishing these goals and reaching such milestones, I haven’t really talked about what to do when you experience a major setback that throws you off course.
With that in mind, I wanted to look at three money setback scenarios and how you can rebound from them:
Rebuilding your emergency fund after tapping it
First the good news: by having an emergency fund in place, you’ve likely saved yourself a lot of headache and debt when disaster — in whatever form — struck. The bad news is that, once the storm has passed, it’s time to rebuild that fund and ensure you’re ready for the future. Of course, whether it’s been a while since you first built your fund or you’re still a bit skittish about setting money aside before you’ve fully rebounded, the task of putting your emergency fund back together can be a tall one. Still, there are a few things that can make the job a bit easier.
Like with most savings goals, one of the easiest ways to painless stash cash is to set up some form of automation. In some case, this can be accomplished directly through your bank or you can try third-party apps like Clarity Money to set aside funds. As far as how much to save or how often, I’d recommend choosing a figure that equates to about 10% of your net income (if possible, of course) and breaking that into contributions made weekly or monthly until your fund is rebuilt.
Earning extra interest
What can also help when rebuilding your emergency fund (and after) is moving it to an account where you might earn some extra interest. For example my wife and I have taken to keeping the majority of our emergency fund in an online savings account for the simple reason that it currently boasts a 1.75% APY. When you’re talking about an account with thousands of dollars in it, this can really add up. And besides — it’s free money! The only potential downside of this plan is that online savings accounts might not be as instantly accessible as other types of accounts. Therefore it may be a good idea to store at least a portion of your emergency fund in an account you can write checks from or otherwise get access to your money instantly.
Adjusting your budget
Given the need to rebuild your emergency fund and presented with the possibility that you may not be making as much as you did before your emergency hit, you’ll like to need to make some extra room in your budget. Once again, apps like Clarity Money and Mint can help you do this by pinpointing some of the areas you can cut back on. In fact, Clarity includes a neat tool that will instantly total up how much you’ve spent on things like Starbucks or iTunes for a week, month, or year. This can be eye-opening and hopefully lead you to find a path toward reaching your goal.
Setting additional goals
Speaking of goals, admittedly “rebuilding an emergency fund” isn’t a terribly sexy one. Therefore, if you’re in need of some extra motivation, consider tacking on an additional money goal for once your emergency fund is complete. This could be saving up for the ultimate vacation, upgrading a part of your home, or something else that you deem a good use of your money. Not only will setting this long-term fun goal give you something to look forward to but will also keep you in the habit of saving even after your main task is done.
Keeping your retirement savings going after leaving a job
Savings for retirement is pretty simple when you work for a company that offers a 401(k) plan. After all, joining the plan is relatively easy and your contributions come right out of your paychecks — not to mention that your savings are likely boosted by employer matching and profit sharing. That’s why leaving a position with a 401(k) (whether voluntarily or not) can often prove to be a bit of a speed bump for your retirement savings. This is especially true if you aren’t fully vested and end up having to give a portion of your matching funds back. Luckily, leaving your 401(k) behind isn’t as horrendous as it may seem and there are plenty of options to make up for the loss.
Moving your 401(k) money
The first thing you should know about your retirement account and departing your employer is that you do have a few choices for what to do with the money. Among them, you are able to leave you 401(k) where it is. Obviously you won’t be able to make additional contributions or receive any employer matching in your account, but your current vested amount will remain invested in the plan, allowing it to grow.
Another and likely better option is to move your 401(k) funds to an individual retirement account, better known as an IRA. The reason why this may be a better plan is that you’ll want to continue saving for your retirement — and having an IRA that’s independent from your employer can allow you to do that. Plus, transferring your existing funds can be a great way to help kickstart your new account. On that note, transferred funds won’t count toward your annual IRA contribution limit, which is currently set at $5,500 for those under age 50.
Contributing to your account
Once you have your IRA set up, the key is to continue making contributions to it. Depending on where you open your account, you may have different options for automating contributions. Alternatively, you can always set aside money in a savings account and then make manual contributions once you’ve saved up a certain amount. However, the sooner you can get your money invested, the better.
Other retirement alternatives
I should also mention that those traditional IRAs are far from your only retirement savings option as well. For example, a Roth IRA could be very beneficial as it allows you to pay taxes on your income upfront, but make tax-free withdrawals of your contributions and gains after you’ve reached retirement (note: depending on your income, your Roth contributions may still qualify you for a saver’s credit on your tax bill).
Keep in mind that having an IRA doesn’t mean you shouldn’t still sign up for a 401(k) if your new job offers one. Not only will you want to take advantage of any matching funds but 401(k)s do have considerably higher contribution limits than IRAs (currently $18,500 vs. $5,500). Meanwhile, for those leaving their regular jobs to join the ranks of the self-employed, you may consider a SEP-IRA, which also offers much higher annual contribution limits to help ensure you meet your retirement savings goals.
Getting back to your budget after overspending
Just because budgeting has been made easier by various apps and tools doesn’t mean it’s actually easy. As impulsive beings, we are still prone to make bad money decisions, buy things we don’t need, and otherwise blow our budgets. While these missteps can sometimes be quickly erased and forgiven, other times our errors can catch up with us in a big bad way. So what do you do afterward?
Tackling your debt first
Depending on how major your spending binge was, you may have incurred some debt or at least racked up some sizeable credit card bills. Letting that debt linger can only lead to more problems so it’s important to tackle it as soon as possible.
There are a few different plans of attack you can take when it comes to wiping out your debt. For those who thrive on small wins and seeing progress made, it may make sense to take out their smallest debt first and continue in order of balance size. Of course, if you’re looking to save the most money you can, it makes sense to go after your most expensive debts (those with the highest interest rate) first regardless of their size. It really comes down to what works best for you and what will allow you to get out of debt in the shortest amount of time.
Assessing why your budget failed (and fixing it)
Maybe the problem wasn’t with you but with your budget… okay, you still have to take most of the blame for overspending but your overzealous budget may have played a role as well. This is to say that some people may look at budgeting like a crash diet where they need to make extreme changes in order to see results. In both cases, you’re likely to fail because the changes you’re trying to make are too drastic to be realistic. Then, when you fail to reach your new goals, you may just throw the entire thing out the window and resume your freewheeling ways.
If you’ve tried to jump into the deep end of budgeting only to find yourself drowning, perhaps you should try wading in slowly instead. Sure you’ll want to ensure that you’re making cuts and being fiscally responsible, but you don’t need to go from 0 to 100 overnight. Maybe you can cut your spending by 10% one month and take it from there. As I mentioned in the emergency fund section, setting goals can also help give the motivation to not only stick to your current budget but strive to “slim down” even more.
The motivation and great feeling you gain from seeing your savings grow and reaching your money goals can be great, but beating temptation entirely can be tough. That’s why you may want to consider adding some levels of accountability to your budget.
A couple of years ago, Ally introduced a limited beta app called Splurge Alert that would notify a user’s friends and loved once if they were in the vicinity of one of their favorite splurge spots. Although this app was mostly a gimmick, the idea behind it isn’t as crazy as it may seem. In fact, involving others in your finances and asking them to hold you accountable can actually be a strong tool for keeping you on track. Obviously this level of sharing might not be for everyone, but there are benefits to those who can handle it.
Admittedly, sometimes personal finance blogs can make the road to financial freedom sound simple. In reality, there are sure to be some speed bumps, potholes, and — God forbid — some landslides along the way. Although these setbacks can be painful, confusing, and disheartening, it’s important that you set a plan to learn and rebound from them. Whether it means rebuilding an emergency fund, continuing toward your retirement savings, or getting back to your budget, believe you can overcome your obstacles and ultimately reach your money milestones.
This article was first published on Money@30.