How to Recover From Financial Trauma

Financial trauma can be described as the emotional aftermath of severe financial setbacks. Examples of these include job loss, bankruptcy, loss of investments, or overwhelming debt. These are all difficult things to deal with, but recovery is possible. Think of this post as a jump-start on how to recover from financial trauma.

Becoming financially resilient is more important than ever. The stress or anxiety from financial trauma can lead to avoidance behavior, like ignoring bills. Financial trauma can also lead people to focus on short-term survival. Because of that, goals like adding to emergency funds or investing for the future – both of which build financial resilience can end up on the back burner.

If you’re feeling overwhelmed, that’s understandable. But acting is a must for your financial and emotional recovery.

Topics Covered:
What is Financial Trauma?
Start the Healing Process
Create a Plan of Action
Rebuilding Credit & Financial Standing
How Can CreditU Help
Key Insights

What is Financial Trauma?

Managing finances is stressful as it is. If you had to go through any type of financial trauma recovery is both exhausting and tedious.  Financial trauma refers to the psychological distress and overwhelming emotional response individuals experience in related to financial events, crises, or stressors. This trauma can stem from damaging the sense of financial well-being. Here are some examples of situations that could lead to financial trauma include:

Sudden financial loss: Unexpected events such as losing a job, a business failure, or significant investment losses that drastically change your financial stability.
Long-term financial hardship: Long-term struggles with money, including difficulties in paying for basic needs like food, shelter, and healthcare, often resulted by low income or large amounts of debt.
Disasters and global crises: Natural disasters, pandemics, or economic recessions/depressions that cause widespread financial strain or personal financial struggle.

Financial trauma can have various psychological impacts, such as:

Anxiety and chronic stress: Ongoing worries about money can lead to high levels of anxiety and stress, affecting physical health, relationships, and overall quality of life.
Depression: Financial struggles can contribute to feelings of hopelessness, decreased self-esteem, and depression, making day-to-day functioning challenging.
Avoidance: Some individuals may cope by avoiding thinking about or dealing with their financial situation, which can lead to much bigger financial problems.
Financial stress can lead to conflicts within families or between partners. This can cause unhealthy dynamics in relationships.

Addressing financial trauma often requires a comprehensive approach. Financial counseling can help individuals nurture healthier financial habits, and establish a sense of control over your financial futures.

Start the Healing Process

Allow yourself to process your emotions and find support from close ones. Define your financial goals and the steps you’ll take to achieve them. To recover from financial issues, seek professional guidance from a financial planner or counselor.

Understandably, you might be feeling cautious of financial institutions and systems after suffering from financial trauma. While there are some shady or ill-informed practices out there, you can still find legitimate help. Rebuild your trust in financial institutions and systems by looking for certified credit counselors or other types of financial advisors.

Good financial advisors will give you ethical advice for your money management and goals. Look for verifiable certifications, such as CFP, CFA, PFS, or ChFC. You can also speak with certified credit counselors – like on CreditU! They’re certified by the Partnership for Financial Education.

Create a Plan of Action Based On Your Situation

When you’re learning how to recover from financial trauma, your specific circumstance determines the plan. For example, if you’re dealing with debt, create a budget to track your income, expenses, and debts. This will help you identify areas to cut back and allocate more funds towards paying off debt. Prioritizing your high-interest debts can be an effective start, since you’ll save money on interest in the long run. Try negotiating with your creditors, too. If you explain your situation, your creditors may be able to work out a more manageable repayment plan for you. For extra support, consider using CreditU’s debt management tools. You can also speak to our credit counselors about other options such as a debt management program.

If you suffered major investment losses, speak with a financial advisor who can put you back on the best path, and help you plan your retirement. Or if you’ve just completed bankruptcy, take the steps to recover financially. This includes creating a budget to avoid overspending (and more debt), seeking financial education to learn how to avoid bankruptcy in the future, and rebuilding credit. This brings us to our next point.

Rebuilding Your Credit and Financial Standing

Significant financial setbacks often result in decreased credit scores and savings. But you can get back on track. Review your credit reports from Equifax, Experian, and TransUnion. This will help you see where you stand with your credit accounts, and understand what lenders will see. Practice good habits to increase your credit score, such as paying your bills on time, making more than the minimum payment, and keeping a low credit utilization ratio (below 30%). Avoid applying for new credit cards during this time, as each application results in a hard inquiry on your credit report. Too many hard inquiries will decrease your credit score.

How Can CreditU Help?