At a glance

  • Don’t dwell on what went wrong; focus on how to move forward.
  • Minimize tax consequences when drawing from investments.
  • Switch to a crisis-mode budget temporarily.
  • Rebuild your finances so they’re stronger in the future.

If you’re facing a tough financial challenge, you’re not alone. Just about all of us face money struggles at some point in our lives.

Maybe you lost your job, made an investment that didn’t work out, or encountered a large, unexpected expense. Or maybe you’re struggling to pay off student debt or medical bills.

Whatever the challenge, you can put yourself in a better financial position. The sooner you start, the sooner you’ll get on track.

Here are 5 steps that can help when you manage a financial shock.

Step 1. Control your thoughts

Chuck Riley
Chuck Riley

Before tackling the details of your finances, it’s important to get into the right frame of mind. That means you need to let go of negative feelings and, instead, focus on solutions.

“Stress is the enemy of good decisions,” said Chuck Riley, a senior financial advisor in Vanguard Personal Advisor Services®.

Coping with financial stress isn’t easy. But there are proven strategies that can help. Here are a few to consider:

  • Write it down. This trick might feel silly but it works: Write down your problem using the third person. For example: “She lost her job; here are her” Or “He owes X amount; here’s how he can pay it off.” This exercise can help you gain perspective and objectively identify potential next steps.
  • Focus on today. Stop replaying how you could have avoided financial problems. Thinking too much about the past (or worrying about the future) won’t help you. Instead, focus on what you can do right now to improve your situation.
  • Take action. Staying busy can help you focus on the present. Getting a second job or working part-time has a double benefit: You’ll be too busy to worry, and you’ll earn money that can help you meet your financial goals.

Step 2. Tap your assets in the right order

Depending on your personal situation, you may need to withdraw from your savings or retirement accounts.

If you’re age 59½ or older, you may have more options because you can draw on your retirement accounts without paying fees and penalties. However, if you’re not yet eligible for retirement distributions, you can minimize fees and penalties by withdrawing from your accounts in the following order:

  1. Emergency fund. If you have an emergency fund, now’s the time to use it. Unfortunately, many people don’t stash much away in easy-to-access savings or money market accounts.
  2. Taxable (nonretirement) investments. If you have nonretirement accounts with stocks, bonds, or mutual funds, consider drawing from those next. If you’ve held the investment for a year or less, the funds will be taxed as ordinary income. Investments you’ve held for more than a year are subject to long-term capital gains tax, which is 0%, 15%, or 20%, depending on your taxable income.
  3. Roth IRA contributions. Roth IRAs give you more flexibility than other types of retirement accounts. That’s because you can withdraw contributions anytime. Just be sure not to take out more than you put in since earnings are subject to early withdrawal penalties.
  4. Loan from a 401(k). You may be eligible to borrow from your retirement plan. However, loans are subject to your individual plan rules, so you’ll have to check with your plan administrator to find out what percentage of assets you can borrow. And there are downsides. You have to pay back the loan within a certain time period. If you don’t, you have to pay taxes on the entire loan amount. In addition, if you leave your job, you could be forced to pay back the loan sooner. Even if everything goes as planned, you’ll have to pay interest on the loan. And while you’ll be “paying yourself back,” you’ll be doing so with taxed earnings.
  5. Withdrawal from an IRA or a 401(k). If eligible, you can withdraw money from your account for a serious financial hardship and avoid paying penalties. For example, hardship withdrawals can be used for unreimbursed medical expenses, purchase of a principal residence, and payments made to avoid foreclosure on a principal residence.
  6. Unsecured credit, such as credit card debt. Be careful when taking on high-interest debt. It uses the power of compounding interest against you. Your debt can grow and snowball quickly. That can add years to the time it takes to pay it back, which can make it more difficult to recover from a financial shock.

In addition to drawing on your savings, it’s a good idea to limit the amount of money you need by cutting your spending.

Hardship withdrawals

Roth distribution rules

Step 3: Cut spending temporarily

If you’re struggling financially, cutting your spending is a critical step. In some cases, you may need to make drastic changes to your monthly expenses.

“People often fall into the trap of thinking they can generally maintain their current lifestyle and still recover financially,” Riley said. “When you have a severe financial setback, you have to make substantial changes. If you don’t, it’s going to take you longer and cost you more to get back to where you were.”

If you don’t already have a budget, it’s time to get started. That means tracking every expense you have and deciding if it’s necessary. Depending on your situation, you may want to consider an extreme “crisis mode” budget, focusing on the following priorities:

  • Housing.
  • Food.
  • Utilities.
  • Transportation.

“Concentrate on the big expenses you need to keep,” Riley said. “Everything else can wait.”

Strategies for living on a bare-bones budget

Living on a budget is one of the best tools you have for weathering financial problems. But it’s not easy or fun. You may need to cut the cable, cancel a vacation, or put nonessential shopping on hold.

Here are some strategies that can make it easier:

  • Remember, it’s temporary. Keep in mind that your bare-bones budget isn’t permanent. It’s just there temporarily, until you get back on your feet.
  • Get peer support. You need someone who’s willing to say “You’re getting off track and spending too much.” If you don’t have someone you trust to do that, then consider looking online to find a frugal support group.
  • Track your wins. One of the benefits of a budget is that you can see your progress. Meeting daily, weekly, or monthly goals can motivate you to keep going.
  • Change your approach to social media. People often brag online, even when they’re struggling in real life. They post pictures of themselves on vacations or at restaurants. Logging off social media can help you avoid comparing yourself to others.

When your financial situation improves, you’re not going to regret the steps you took to save money.

“The more sacrifices you make during this time, the better off you’ll be,” Riley said. “In extreme cases, some people will live on peanut butter and jelly and ramen for a few months. Proving you can be disciplined when the chips are down can give you confidence to get back on track.”

Budget calculator 

Step 4. Rebuild

Once you’ve gotten out of debt, found a job, or stabilized your finances, you can start to rebuild.

A financial crisis can be a wake-up call. It’s an opportunity to put yourself in a better spot than you were in before. Here’s how:

  • Save your crisis budget. After you switch to a more livable budget, it’s a good idea to save a copy of your crisis budget. It can serve as inspiration to save money in the future. In addition, you’ll have a plan if you ever need it. “You should be able to say, ‘If I lost my job, the first thing I’d do is cut cable. Then I’d cancel my gym membership. That will save X amount per month right away,’” Riley said.
  • Build an emergency fund. An emergency fund is key to a solid financial plan. Riley recommends that a family relying on 1 income save about 6 months of basic living expenses. A family in dual-income household has less risk. If 1 spouse loses a job, the other can continue to earn income. In that case, 3 months of expenses may be enough. Invest your emergency fund in a low-risk savings account or money market account. You might be tempted to invest it aggressively, but don’t. Market declines and job losses often go hand-in-hand.
  • Catch up on retirement contributions. If you’ve had a setback and used money from your retirement accounts, it’s important to build your savings back up. Under normal circumstances, we recommend saving 12% to 15% of your earnings for retirement. If you’re trying to make up for lost time, consider boosting the percentage you save (at least temporarily). Just be careful not to exceed the annual contribution limit.

Building an emergency fund

Vanguard money market accounts

Step 5. Stay positive

Digging your way out of a tough financial spot often takes time. You might need to work for months or years to reach your goals. That’s why it’s important to balance your hard work and sacrifice with a positive attitude.

Here are few strategies to stay on track:

  • Reset your goals and expectations. Depending on your finances and your stage in life, that may mean waiting to renovate your home or skipping a vacation. Or it may mean living in a smaller house or planning to work past your (planned) retirement age. You might exceed your new goals. But you’re not a failure if you don’t.
  • Don’t think about it. Many people have trouble enjoying life when they’re dealing with stress. Force yourself to forget about your finances for periods of time. Focus on other aspects of life instead.
  • Count your wins. Did you pay off a credit card? Get a new job? Go ahead and celebrate―just don’t throw your budget off track. As you make progress, take time to look back on where you started and how far you’ve come.


All investing is subject to risk, including the possible loss of the money you invest.

We recommend that you consult a tax or financial advisor about your individual situation.