Lessons from surviving a personal financial crisis

Almost a decade ago, our family suffered a personal financial disaster that started with a storm. I was renting out our home we'd purchased when I was stationed at Eglin Air Force Base in Florida. The storm caused major flooding throughout the town, and there were 6 inches of standing water in our home.

After a cleanup crew ripped out every water-damaged item under 4 feet, the real fun began: replacing the sheetrock, painting, installing new kitchen cabinets, carpet and doors — you get the idea. Our final repair bill topped $50,000.

Even if you're prepared for a financial crisis, it can take years — and a lot of sleepless nights — to recover. I learned two important lessons from ours: how to get through it and how to lessen the impact if another setback rolls around.

What's a personal financial crisis?

A personal financial crisis is a situation that causes a sudden and possibly prolonged shock to your financial security. In our case, the financial crisis was caused by a natural disaster, but crises can come from medical emergencies, a lost job, divorce and more.

Regardless of the root cause, people dealing with financial crises experience many of the same consequences, including feeling stress and overwhelmed, a loss of confidence, and the inability to move forward.

How to get through a personal financial crisis

As a financial advisor, I have talked to lots of folks who've experienced personal financial disasters and are on a path to recovery. I can assure you, while it's never easy, you can get through it.

If you're currently wading through a financial crisis, take the following steps.

Minimize the damage.

Surviving a personal financial crisis starts with determining if the problem is still occurring. If it is, you want to protect your property or yourself from additional harm.

Many insurance policies include a clause that states you must take reasonable steps to protect your property from further damage. What does that mean? Let's say you have a hole in your roof. A reasonable step could be to place a tarp over the hole to prevent additional water from leaking through. If the windows are blown out, you could cover them with plywood.

Document the damage.

As you wade through the early and most challenging days of your personal financial crisis, document the damage.

In our case, that meant starting the claims process. As we filed our claim, we snapped lots of photos and saved all our receipts.

Regardless of the cause of your personal financial disaster, you want to keep careful notes. Maintain copies of important correspondence, a list of items damaged and receipts of work already accomplished, just to name a few.

Cut back on expenses.

While working through a personal financial crisis, be careful not to add to your expenses. You want to free up your cash flow to help pay for necessary costs as they pop up.

For many people, this can mean cutting back on eating out and taking vacations. Assess your other forms of entertainment, too, to see if there are monthly bills, such as streaming services, you could live without.

Use other people's money before your own.

Be sure any insurance or warranties you have are paying what they promised. When they cover part of the recovery costs, that's less coming out of your own pocket.

In our case, we had flood insurance. While our insurance adjuster was outstanding and fair, he did make a few mistakes. That's understandable, considering that most of the town experienced some damage and all the adjusters were working overtime.

For example, when he wrote "entertainment center" on our claim form, it was calculated at a lower cost than what it was actually worth as a custom built-in cabinet. After I called him and shared photos, he modified the claim and the replacement cost doubled which meant more insurance money to replace the item as it originally was. This happened on a few items and, over time, it added up to a difference of several thousand dollars.

Another example: If your interior doors are solid wood and the adjuster marked them as having a hollow core, the price difference is significant. You want to be sure the claim form represents the quality of what was lost.

Assess your savings.

USAA advises everyone to have an emergency fund made up of three to six months' worth of living expenses. If you don't have one, what other sources do you have to help cover expenses? Can you tap into savings or get a second job to earn extra income?

While your retirement savings can be a source of money during a disaster, if a qualifying exception doesn't apply, you could potentially face taxes and penalties for withdrawing the money if you're younger than 59½. Therefore, use them as a last resort.

While you should only use retirement savings as a last resort, it's better to fall behind on retirement planning and pay a penalty than to starve or lose your home.

If you have questions about whether you qualify for a withdrawal exception, consult with a qualified tax or financial professional.

How to recover from personal financial crisis

Once the acute crisis is over, it's time to begin the recovery process. You already began the first recovery step when you cut back on unnecessary expenses. Keep up the good work!

Here are the next steps toward financial recovery.

Examine your bills closely.

As you recover from a personal financial crisis, the bills can stack up quickly and may feel like they're coming from all directions. As they arrive, put them in a safe place. Then reserve some time each week to sort through them and ensure their accuracy.

Medical bills can be especially confusing, so don't be afraid to contact the medical provider to ensure accuracy. Keep in mind that usually you can negotiate your payment options. If your medical providers are willing to work with you to establish a payment plan, be sure you understand the terms and conditions and get it in writing for your records.

Providers may also be willing to settle for a reduced fee if you pay it all at once. My daughter once had an emergency room bill of $2,750, and the hospital agreed to accept a total of $2,000 if I settled the account immediately.

Develop a new budget that focuses on financial recovery.

Even with flood insurance, we had to pay our deductible and other unexpected repair costs and living expenses. Fortunately, we had an emergency fund to get us through the early days. Unfortunately, we drained it.

As we established our new budget, we had to focus on rebuilding our emergency fund, so we'd be prepared for the next inevitable emergency. In our case, it took us two years to restock our emergency fund. During that period, we made a lot of sacrifices just like the advice mentioned earlier. We did not eat out as much, did not take vacations, and delayed major purchases.

Those sacrifices were worth it for the feeling of security we had once our emergency fund was fully stocked — and I can assure you that we took the money we were using to pay ourselves back that next month to treat ourselves to a nice meal to celebrate!

How to minimize the impact of a personal financial crisis in the future

Anytime we go through a personal hardship, we learn important lessons. Ask yourself the following questions, which can guide you through the reflection process.

What caused the biggest financial impact?

In many cases, personal financial crises are caused by events beyond our control. In the case of our flood, the town's storm drains could not keep up with the rainfall, and everyone suffered. I still have a picture of a neighbor kayaking down our street. There was nothing we could have done to prevent the disaster. But because we had an emergency fund, we were able to prevent a colossal financial setback.

If your personal financial disaster was caused by a lack of financial discipline, this is a great opportunity to create and stick to a budget. That's the first step to spending less than you earn, which is the only way to get ahead. If you're constantly spending more than you earn, you'll go deeper and deeper in debt, which can make it difficult to recover.

What part of your financial portfolio took the biggest hit?

For us, flood insurance saved the day. My deductible was $2,500, and the flood repairs totaled $45,000. We spent an additional $5,000 to prepare the home to sell. We did not have $50,000 in a savings account, so flood insurance saved the day. If you have questions about flood insurance, check out this article.

I can't say enough about the importance of an emergency fund. Without one, you're often forced to rely on high-interest-rate credit cards and, as a result, go into debt. It took us two years to rebuild our emergency fund, but I don't even like to think about how long it would have taken us to pay off credit card bills much less the extra cost we would have paid through interest.

If you calculate three to six months' worth of living expenses and it feels like a lot, don't get discouraged. Start with saving $1,000, and then continue to save to reach your goal. Over time, you'll get there. Here's how you can jump-start your emergency fund.

Assess your life insurance.

This is probably the hardest to talk about. But the loss of a loved one can cause a tremendous personal financial crisis. To protect those left behind, it's critical to have life insurance. While life insurance will never replace your loved one, it can help navigate the financial difficulties that can arise.

And this life insurance need doesn't just apply to the breadwinner. We have life insurance on my stay-at-home wife because of the value she brings. While we could never truly put a price on what she means to us, the cost of child care which she provides would be pricey. She brings much value even though she doesn't bring in a salary.

Give yourself a pep talk.

You can get through this. Take it one day at a time and stick with your plan. There will be missteps; forgive yourself and get back on track.

You can even recover from bankruptcy, which stays on your credit report for seven years. You can put it behind you much sooner than that through effective spending control and a plan to pay down debt.

The road to financial recovery is paved with good decisions, careful spending and honest analysis. While no amount of preparation can eliminate all personal financial setbacks, it can minimize the bumps in the road.

The USAA Advice Center provides general advice, tools and resources to guide your journey. Content may mention products, features or services that USAA Federal Savings Bank does not offer. The information contained is provided for informational purposes only and is not intended to represent any endorsement, expressed or implied, by USAA or any affiliates. All information provided is subject to change without notice.