The 6 Stages of Dealing With Financial Disaster

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Sometimes, no matter how frugal and prudent we are, financial disaster hits and turns our lives upside down. Maybe it's an unexpected health issue that we're not insured for, a whopping and unavoidable housing expense, or a job loss that leads to a long stretch of unemployment. It happens — and if it hasn't happened to you, you probably know someone who's been down that rocky road. (See also: Are Your Finances Fragile?)

Whatever the cause, it seems people have similar reactions to financial disaster and similar phases of recovery. Here are six common stages we go through as we grieve our loss and work to rebuild our financial lives.

1. Shock and Denial

Understandably, dramatic changes in our financial fortunes can initially inspire a sense of shock, disbelief, and denial. Whatever path brought us up to and over the edge of our financial cliff may have been paved with the best intentions and highest optimism — buying a new house, investing in a business, or pursuing an advanced degree. Part of the recovery process is waking up to the fact that the dream is over — at least for now — and who wants such a rude awakening? Shock and denial insulate us from a painful reality and forestall the inevitable packing-up of our dream.

2. Depression

Once the shock wears off and constant denial simply can't be maintained, depression fills the void. Depression prepares us for acceptance and is both a part of admitting defeat and its logical result. Depression is the clearest mourning phase in financial upheaval — it's the point at which we acknowledge a very real loss, grieve the plans we made, and emotionally and financially hibernate.

3. Acceptance

Acceptance is the first stage of active recovery. The shock is passed, the denial is over, and depression is giving way to reality (however wince-worthy it may be). At this point, it's helpful to remind ourselves of the things we still have — marketable skills, the support of family and friends, zero debt, or a car that's modest but dependable and paid for. However deep you have to dig to find the positives, find them and use them to fuel your momentum.

4. Analysis and Learning

In marketing, we call this the post-mortem stage. It begins by asking and then honestly answering a few very simple questions.

What (Really) Happened?

Getting a clear answer is trickier than it sounds. Often, we struggle to understand the nature of the problem. What led to the foreclosure — was it an unmanageable interest rate? An ill-advised refi? Out-of-control spending? All of the above?

How Did This Happen?

Digging a bit deeper, asking "how" helps us link behavior to circumstances and outcomes. The answer is the first step toward making the changes necessary to minimize the chance of future trouble.

What Could I Have Done Differently?

Once we understand what happened and how it happened, we can begin to reflect on options that might have helped us dodge the disaster, or do so in the future.

What Have I Learned for Next Time?

This question links everything together. And while the answer isn't always crystal clear, asking it is important. The lessons we learn from financial upheaval are some of the most valuable things we're left with. Making them an honest part of our story helps turn them into foundations of future success.

5. Rebuilding

This is go time. The rebuilding stage gives traction to the analysis and learning we've done. Here, we've fully surrendered the Plan A and are focused on creating a just-as-wonderful (although perhaps more modest) Plan B. New insight and smarter approaches take shape (complete with redundancies and safeguards) as we plot the next steps to achieve our goals.

6. Fortification

This stage can be summed up perfectly in a famous quote by Scarlett O'Hara in Gone With the Wind: "As God is my witness, I'll never be hungry again." Fortification is "recovery plus" — an attempt to make any sort of hiccup or failure extremely unlikely by having extra savings, additional resources, or deeper knowledge. For example, re-entering the real estate market might happen only after a person is sure of securing a better interest rate, borrowing far less than she's qualified for, having a healthy emergency fund, and securing a space large enough to take in a rent-paying roommate. (See also: A Step-by-Step Guide to Creating Your Emergency Fund)

A wise and dear friend of mine used to say, "Few things in life are irreversible" and those words are especially important to remember if you're facing or recovering from financial disaster. As remote as the idea may seem in the thick of things, we live in a world that still gives second chances; don't ever feel like you can't claim your own. Again, in the immortal words of Scarlett O'Hara, "After all…tomorrow is another day."

Have you weathered a financial disaster? What were the most difficult stages as you coped and recovered?

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