There inevitably comes a time when emergency funds, or related savings get wiped out. Some of us are cool cucumbers about this, and acknowledge that well – that’s what emergency savings are for. But for some of us – especially single-digit millionaires who may see much larger sums used up – the effect can be crushing. All those years of savings gone! This is when it’s important to take a deep breath, and focus on the first month:
What to do in your first month of rebuilding savings
If it was a matter of simple maths, we could use the usual spiel: set aside 20 per cent of your income, etc. But personal finance is as much about psychology and our emotional state, as it is about maths.
The first month after your savings are wiped, you might be feeling especially vulnerable. You might be frustrated and see your lost savings as a blow, rather than a successful save (remember, if you hadn’t had those savings, you’d be worse off).
In some cases, you may even feel impatient and reckless, wanting to “build back” your savings fast. These can lead to mistakes, so it’s important to rein it in, and focus on the following for the first month:
- Don’t take high-risk approaches to rebuild your savings faster
- Be wary of total abandonment
- Consider controlled liquidation of some assets
- Check if your insurance coverage can be modified
- Set realistic milestones
1. Don’t take high-risk approaches to rebuild your savings faster
There’s a tendency, after taking a big financial loss, to try and recover fast. We see the same trait among stock traders sometimes, who want to double down and “make up” their losses with bigger and riskier trades.
In your first month, it’s important to quell this impulse, until you’ve allowed your emotions to settle a bit. Give yourself a 30-day time out from making any trades or high-risk investments.
Remember, you’re at your most vulnerable when your savings have been heavily depleted. That makes it the literal worst time for high-risk investments, despite any gnawing impatience to quickly “fix things”.
2. Be wary of total abandonment
Consider the person on a failed diet, who after cheating, gives up completely – there’s total loss abandonment of the plan, as it’s “failed anyway”.
Likewise, failing at tests or exams can send some into a permanent downward academic spiral, where they completely give up rather than bounce back.
These same psychological tendencies can affect some of us, when we lose a lot of our savings or take a bad portfolio hit. The key is to not give in and abandon the plan altogether: force yourself to start with small savings, and slowly rebuild. Even saving the first $50 will help to anchor you a little.
Don’t allow yourself to skip saving or go on spending sprees, thinking you’ll “restart the savings” later, or that you may as well enjoy every cent as the savings are “gone anyway”.
Little by little, you can rebuild the habit and get back on track.
3. Consider controlled liquidation of some assets
If your savings are wiped totally, and you’re feeling dangerously vulnerable, you might liquidate some assets to have at least a basic emergency fund. The key here is controlled liquidation.
Don’t go overboard and start selling every bond, stock, unit, etc. to try and immediately replenish your full savings. This will likely derail any long-term investment plans, and could indirectly result in worse losses (e.g., losing all the accrued interest in a fixed deposit you’ve had for close to a decade, because you feel a need to instantly replenish an emergency fund).
Talk to a financial professional, and see what you can reasonably sell off to rebuild some savings. Even so, don’t be over-ambitious: you don’t need to restore your whole savings fund in a single month or two. You just need enough to be financially safe, while rebuilding.
4. Check if your insurance coverage can be modified
Some insurance policies are flexible. If you know your savings are down, you might want to consider raising the amount of coverage you have; this will ensure your safety net remains strong, even on limited savings.
If need be, get an expert to do a policy review, and see if you can find something that suits your current situation better. You may, for instance, be better off with policies emphasizing protection over savings, while you rebuild your finances.
5. Set realistic milestones
Avoid the temptation of unrealistic goals, like deciding you’ll rebuild a six or 12-month emergency fund in a single year. You’ll likely be demoralised when you miss the goal, and fall into the trap of giving up, or taking reckless risks (see above).
Also note that very ambitious goals – such as saving more than half your income for the next year – are likely to be unsustainable. These can set you down the same path to disappointment.
Rather, look back on how long you took to build your savings previously, and use that as a guide. If you want to be ambitious, or your income is higher, you can shorten the time frame accordingly. For example:
Say it took you three years to build a savings of $100,000, on an income of $15,000 a month.
This amount was wiped out in a legal or medical emergency, but today you’re earning $20,000, or about 33 per cent more.
You might aim to rebuild your $100,000 emergency fund in two years instead (also shortening the time by about a third).
This is just one way of setting a goal; you can try others that make your feel sufficiently motivated. But stick to a goal that’s quantifiable, sustainable, and realistic – even if it seems slow.
Have you ever wiped out your savings, or taken a bad financial stumble? Comment and tell us what it’s like and how you got through it. You can also contact us at Single Digit Millionaire, and find peers and experts who can deliver helpful advice.
