How To Bounce Back From Being Broke On a High Salary
If you’re earning six or seven figures a year, you might think going broke is impossible. After all, a high salary typically means wealth and financial stability, right? But just because you earn a lot of money doesn’t mean you’re exempt from financial hardship. Life happens, and sometimes things are simply beyond your control.
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If you’ve gone through significant financial troubles while earning a high salary, here are some ways to bounce back.
Make a New Budget
If you don’t have a budget, or if yours is out of date, it’s time to make a new one.
“While it may seem obvious, developing a budget is the most effective way to stay on top of your finances, live within your means and not spend more than you earn. It’s basic money-management 101: list every source of money coming into your household, and list every expense,” said Erika Kullberg, an attorney, personal finance expert and the founder of Erika.com.
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You’ll know where you stand by writing down your income, expenses and your current assets and liabilities. This also helps you figure out what changes you need going forward, whether getting professional help, finding additional income sources or tightening your budget to only spend on essentials.
Know When To Stop the Bleeding
When you start losing money, your first instinct might be to start drawing from your investment or retirement accounts to minimize the damage. But while this might help in a pinch, it causes long-term financial troubles.
“Too often, people deplete their retirement or savings accounts trying to keep up with their monthly expenses. They see the writing on the wall but believe that they will be able to turn it around. By the time they realize they can’t, it’s too late,” said David Chami, financial expert and managing partner at Consumer Attorneys.
That’s why hitting pause and figuring out how to resolve the problem — not just find temporary solutions — is important. This might mean seeking professional help or taking a hard look at your financial situation.
“A consultation with a qualified credit attorney can oftentimes be the difference between starting over with some assets and starting from nothing with nothing. Going broke or bankrupt doesn’t mean you have to start over from zero,” said Chami. “Assessing your current financial/credit situation before you default can allow you to resolve debts or file for bankruptcy while protecting some of your assets, allowing you the jump start you need to rebuild your future.”
Learn From Your Past
“Learn from the past, but look forward,” said Scott Lieberman, founder of Touchdown Money. “Nobody can change the past. What you can do is learn from past mistakes and figure out how to do better.”
Take some time to figure out where you might have gone wrong. Was it a lack of financial planning? Was it taking on too much credit card debt? Whatever the case is, now’s the time to learn from your mistakes and find ways to avoid making them again.
Rebuild Your Credit
If your credit took a hit — such as after filing for bankruptcy — you’ll want to start rebuilding it.
“Understanding how to rebuild your credit after you default on debts or go bankrupt is critical to recovering from your financial hardships,” said Chami. “Using credit education, secured credit cards and high interest, low credit limit cards can be useful tools to rebuilding your credit if used the right way.”
With good credit, you’ll be approved for better premiums, improved terms and lower interest rates. Depending on your industry, having good credit could also help with your application.
Live Below Your Means
Cutting expenses is one thing, but finding other ways to live below your means can really make the difference as you bounce back financially.
“The secret to building wealth is living below your means. You need to be clear on the income coming in and the expenses going out,” said Melissa Murphy Pavone, CFP, CDFA and director of investments at Oppenheimer & Co. Inc. “As your income increases, lifestyle inflation creeps in. Avoid the urge to spend more as you make more. Save more. Invest the difference. Your future self will thank you.”
Get Another Income Source
Adding another source of income can go a long way to helping you bounce back from going broke. It might take time, but it’ll also lend to a sense of financial stability.
“Increase your income to speed up your recovery and improve your financial condition. Raise your earnings by another source of income on the side. Seek a part-time job, a freelance gig or some side hustle of some kind, something like working in a coffee shop or bar or doing deliveries by car,” said Kullberg. “Google: ‘nine high-paying side hustles,’ for example. Learn some new skills or apply for a better-paid job if your income is constrained by the current job.”
Set Smart Goals
Setting smart goals is another way to get your finances back on track.
“If you’ve hit a financial rough patch, it’s important to know that failure is not forever. There are ways to bounce back and create a successful financial situation for yourself and your family,” said Lieberman. “Setting reasonable goals is the best way to give yourself something to work toward.”
Be kind to yourself as you go, though. While being smart with your money can help you bounce back, you might still experience a few minor setbacks along the way. That’s okay — just keep moving toward your goals until you get there.
Build Your Emergency Fund
An emergency savings fund won’t save you in every situation, but it’ll help if you’re facing something like surprise medical bills or a future layoff at work. By creating one, you can keep yourself from future financial hardships like the ones you’ve already faced.
“When you open an emergency fund, do your best to shift money away from expenses in your life so it doesn’t take away from your other priorities. Put something into a new savings account where your money is prepared for that one-in-a-blue-moon expense or just-in-case emergency,” said Kullberg. “You’ll need a cushion of three to six months’ worth of living expenses for when something out of the ordinary happens. “
Use a high-yield savings account to take advantage of higher interest rates. This will help your money grow faster — the more you save and the more the interest compounds, the more your money will work for you.
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This article originally appeared on GOBankingRates.com: How To Bounce Back From Being Broke On a High Salary
