How to psychologically recover from a major financial setback

Three-quarters of American workers over 60 have experienced at least one year without income at some point in their adult lives, according to research by the National Endowment for Financial Education. By age 70, 96% have experienced at least one major life shock like a layoff, serious illness, or divorce. 

Not surprisingly, such events often derail one’s financial stability, further magnifying one’s psychological stress. 

“Whether due to a job loss, bad luck, or simply a bout of overspending, It can feel like a deeply personal crisis,” says Dr. Erika Rasure, a financial therapist, coach, and founder of Crypto Goddess.

This can cause a downward spiral that leads to decreased motivation, bad decision-making, and worsening financial performance in the future. 

But by building your psychological reserves and creating a plan, you can recover from financial stumbles. A recent survey by Ameriprise Financial found that while over 70% of investors experienced a major setback at some point in their lives, nearly 90% were able to get back on track. 

Here are five tips to get started.

1. Assess what happened and identify your goals

People have an innate desire to understand why things happen. Identifying causes helps reduce negative feelings while providing guidance for how to optimize future decisions and behavior. So begin by assessing what contributed to your financial setback. 

There may be multiple causes. Some may be out of your control, like an economic downturn or medical emergency. But be honest with yourself about what was in your control. For example, could you have planned better, chosen a better-paying job, or developed any different habits? 

“It’s easy to blame the system,” says Lawrence Delva-Gonzalez, a financial literacy educator and cohost of The Financial Griot podcast. “But often the mistakes are on you. Accepting that is key to change.”

Next, write down goals to improve your behavior or adapt to the situation. Clear goals can motivate and guide positive behavior change, making it more likely that you’ll succeed. If, for example, someone lost their job due to low performance, they might set a goal to learn new work skills, identify jobs that better match their strengths, or get a mentor. Such goal-setting may also improve your psychological well-being. 

2. Acknowledge what’s happening – stress, emotions, and acceptance

Financial setbacks are stressful. Frustration and anxiety can sap your energy and cloud your thinking. 

“When going through turmoil, it’s easy to get bogged down and feel overwhelmed,” Rasure says. 

But science-backed tactics like journaling, exercise, or seeking social support can improve your well-being 

Rasure recommends giving yourself a safe space to acknowledge what you’re feeling and pay attention to your physical senses. “Go for a walk, exercise, meditate, breathe,” she suggests. “Get grounded.” 

Saundra Davis, a financial coach, educator, and consultant at Sage Financial Solutions, notes that financial setbacks often involve feelings of shame. She suggests creating a “no shame zone” for any time regret or self-blame arises. “In short,” she says, “treat yourself with compassion.”

Finally, accept what happened. Instead of dwelling on the past, imagine you are a fly on the wall observing what happened, and do your best to refocus on the future. Widening your perspective can help reduce negative thoughts and increase insight and closure. “Forgive your past, forgive your errors,” Delva-Gonzalez says. “Make a decision to move forward.”

Accepting setbacks can even provide a catalyst to re-evaluate what you want in the future and grow as a person. 

“Consider the past your ‘before’ picture,” says Kate Phillips, financial educator and founder of Total Wealth coaching. “Then consider what you’d like the ‘after’ to look like.” 

3. Build resilience by adopting a growth mindset 

Third, develop a growth mindset to build resilience and re-motivate yourself. Financial setbacks are often a big hit to our egos, leading to a downward spiral of self-doubt and inertia. 

“Setbacks deconstruct who you think you are,” says Phillips. “Having money and then losing it can actually be harder than never having money, because it affects your identity.” 

So how can you develop the resilience needed to bounce back? Phillips recommends identifying your strengths — perhaps you’re a good friend, strong communicator, or diligent worker. Then identify where you’ve failed and cultivate a “growth mindset.” 

A growth mindset is the belief that people can change, grow, and succeed. Indeed, challenges and setbacks are a necessary part of the learning process. A growth mindset has been shown to increase a sense of self-efficacy and motivation, which in turn increases the chance you’ll actually achieve your goals. This mindset is particularly helpful for people who are currently struggling.

“You have to allow yourself to think differently,” explains Delva-Gonzalez. “You’ve seen videos of a mom picking up her car to save her infant. If you are forced, you will make it happen.”

So instead of believing that the setback negatively impacts your inherent value or abilities, consider how it can help you grow. What can you learn from this? How will it make you a stronger, wiser, more capable person moving forward? 

4. Tackle the problem with a financial plan 

Fourth, tackle your setback with a good financial plan. Problem-solving and planning increase self-efficacy, motivation, and the likelihood you’ll achieve your goals. 

Begin by determining your short- and long-term financial goals. One Ameriprise Financial survey found that most people took one to five years to get their finances back on track, but some took longer. Goals could include anything from getting out of debt to buying a home to taking a vacation. “Give your brain a direction,” Delva-Gonzalez says, “something to work towards.”  

Then create a budget to reach your goals. Reflect on what truly makes you happy, and cut the rest. Delva-Gonzalez recommends you “challenge yourself to cut one hard thing you think you care about, but really don’t.” This will free up money for what is truly valuable.

Platforms like Levyl^UP can help you set goals, create a budget, and get your money back on track. And remember this is an ongoing process; return to your financial plan at least yearly to assess your progress and identify new ways to reach your goals. Tracking your financial goals can also improve your psychological well-being.

5. Use your resources

Finally, use your resources. Seek out information, guidance, and assistance from others. Research finds that financial and social resources influence outcomes even more than the setback itself. 

Financial experts can help you address extreme setbacks like debt restructuring, bankruptcy, and negotiating payment plans with the IRS or lenders. (Though beware that debt settlement companies can wreck your credit if they instruct you to stop paying your debts, so don’t use them if you plan on making big purchases in the near future.)

Public services are also available. Davis notes that some people feel uncomfortable using public services, but they are set up precisely for such situations. Food banks, food stamps, unemployment benefits, public housing assistance, and other social programs should be utilized. Public libraries often provide basic information about such programs. 

Lastly, lean into social support and connect with others. Whether from family, friends, or the broader community like church or support groups, trusted people can provide kindness and guidance. Social support helps buffer the negative effects of setbacks. And simply spending time with others — whether by volunteering, joining a club, or even chatting with a stranger on the bus — is an enjoyable way to boost your happiness.  

In summary

In short, you can get through this. Like millions of other people who have faced financial setbacks, you will probably experience some stress and negativity. But by assessing your situation, cultivating self-compassion and a growth mindset, and implementing a smart financial plan, you will be on your way to psychological and financial recovery.