Dealing with Severe Financial Setbacks

If you think about it the FIRE journey is a journey for life. It doesn't suddenly end when you finally hit that magical number that allows you to declare financial independence. Hopefully the post FIRE part of your journey is going to be much longer than the pre FIRE part, but regardless of where you are in the journey there's one thing you should come to terms with:

You're going to experience financial setbacks and it could be severe

There's almost no getting away from this. One day the car is going to give out, or that boiler is going to break, or you'll have to fork out extra payments towards something you didn't expect. These are easy things to imagine happening to ourselves and it would be unwise to assume it'll never happen again.

But, in most cases these things are relatively easy to deal with; just dip into your emergency fund and hopefully within a short amount of time you'll be back up and running again. Instead, let's think about some situations that are more severe.

This would involve things such as legal costs from evicting a couple of bad tenants who won't leave your rental properties until you've taken them to court. Needing to use money to fix the damages after getting them out. Or needing to use your own money to make funeral arrangements for a close family member who didn't leave anything behind.

Those three things happened to me a few years ago, all at the same time. It took about two full years before I could say that everything was finally wrapped up and completely solved, all the while costing me money at various points to keep the fight going. But I'm glad to say that eventually I made it through and these days I'm solidly back on my path towards financial independence, stronger than ever before.

While the financial setback hurt, the most difficult part of it all was the stress that came with those unfortunate situations. You can always "math" your way out of a money situation but keeping control of stress is a whole different beast, and if you don't have your stress levels under control you're going to be prone to making mistakes or being unable to stick to a plan.

Getting through those situations not only taught me a lot about myself but it gave me a lot of experience in things that many people will not encounter until much later stages in their life. Having had some time to reflect on those events I've managed to boil things down into a couple of key lessons which I'd like to share in this article.

A diagram showing how a financial setback puts you further from the FIRE goal but over time you can slowly get back onto the path for recovery

Emotions are good, inaction is bad

There's no shame in feeling down, sad or upset about the situation that's happening to you and sometimes you will need time to gather your thoughts and feelings. In fact, it's better that you let yourself feel those emotions and take that personal time so that you can come to terms with the situation.

But never bury your head in the sand in the hopes that it will all go away.

Had I tried to ignore my situation it's likely that I would've lost a lot more in terms of unpaid rent and property damages, and maybe even lost the property itself in the worst case. Maybe those bad tenants would still have a grip on my properties to this day.

Stress levels and financial losses would be at a maximum.

However, since I did take actions towards dealing with my issue I was able to keep the stress of it relatively low (there's always going to be a little bit), even when the situation wasn't fully resolved yet. Don't get me wrong, there was plenty of frustration since the process is complex and pedantic, but stress was low.

The lesson: If you're under stress it's highly likely that the source of it is the fact that you're ignoring your issue, because deep down you know you should be doing something about it. The moment you start doing something, those stress levels will go down, even if the problem hasn't been resolved yet.

Set up a defensive budget

After taking a hit it's important to stabilise your current position so that you aren't over exposed to any other surprise setbacks. Remember this is a moment where you're likely to be going into your emergency fund, possibly have reduced or unstable income, and be emotionally affected. You are vulnerable.

Gather information about your financial position so that you know where you stand.

The first thing I did was figure out where all of the possible expenses could come from; legal fees, funeral fees, travel, repair fees and others. Next I estimated how much of my emergency fund it would consume each month and what that really equated to in terms of my financial stability.

Luckily I wasn't dealing with debts or a loss of income situation so I knew that I would still have money coming in; but I recognised that if I suddenly lost my job then my emergency fund would no longer cover me for the expected amount of time I had previously prepared for.

Another setback at this point could actually wipe all of my financial progress.

To counter this I temporarily readjusted my spending into a defensive budget to focus what I could into covering the emergency costs. This meant I only spent money on my absolute needs (housing, bills, food etc) and was prepared to stop my monthly contributions into investments as a last resort (besides actually selling investments). It didn't take long to gain a foothold on the situation, but until that happened I figured I needed to play as defensively as possible.

The lesson: Don't assume your emergency fund makes you invulnerable and do what you can to reduce your increased exposure until you have a better grasp on the situation. Defend yourself from a second or third surprise hit, where the negative effects could be amplified due to your current vulnerability.

Adapt iteratively

After setting up your defensive budget you know you've put yourself into the best position to take further hits if that unfortunately happens; but this isn't the way you want to stay. Your defensive budget is only there to cover your initial increased exposure. If you stopped investing each month you will want to get those payments started back up, and there should probably be some non-essential spend in your life for the purposes of sanity.

You want to work back towards your normal budget while you're still dealing with the setback.

Now normal in this sense meant I had moved away from a purely defensive budget and once again had money regularly going towards normal items that were in my pre-setback budget, without needing to rely on my emergency fund. The only difference was that the amounts were reduced while I was still dealing with the setback, but the fact that I had baked it all into my monthly budget meant that I had adapted to a new "normal".

I did this by setting clear criteria on when I could re-allocate without becoming over-exposed again.

An example would be my allocation towards legal fees. Towards the start of the setback there would've been a lot of activity in the eviction process and a lot of legal consultation required, meaning expenses would've been at their highest. But as the process goes on there will be larger gaps between significant events related to the eviction where not a lot actually happens. During this period I figured I could reduce the amount I was allocating towards legal fees and put it towards something else more normal.

I also prioritised getting my emergency fund back to full strength.

A full strength emergency fund meant I was fully prepared for another setback, and it gave me the confidence to make my re-allocations from defensive items to normal items as I knew I had myself covered if anything flared up once again.

The lesson: It can take time for severe setbacks to become fully resolved so there's no point in stopping your financial progress completely during this time. Instead, set clear criteria for when you can become less defensive so you can adapt yourself iteratively over time as things get better.

Ask for support but don't shirk your responsibility

Nobody wants to feel vulnerable or exposed, and it's easy to feel a sense of embarrassment when your troubles are related to money. It almost feels "easier" to simply try to fix the situation by yourself before anybody else finds out. But in many cases, trying to struggle through the setback all by yourself can make it much more difficult from a psychological perspective.

So if you can, find someone you trust and ask for support.

When I say support I'm not talking about asking them to give you money. Instead I mean gaining encouragement, motivation and that sense of safety from someone you are close to. For me it was family, especially because part of my setback involved a family death. During this time it was difficult to juggle everything altogether as it seemed as though everything needed a decision or some sort of action all at the same time. Being able to ask someone else to help out with a few of the things that were relatively less important meant I was able to focus on the bigger problems.

Asking for that support made me stronger, not weaker.

There is some stigma when it comes to asking for help as it can feel like you're admitting a weakness; yet these are only self imposed views that every individual needs to tackle. It's not only with financial troubles but with any other type of trouble that might be encountered in life. The way I did this was by making sure that I maintained my accountability for the entire situation. Asking for support never meant I could shirk away from my responsibilities, and it was this attitude that gave me the much needed boost in confidence to fully overcome the setback.

The lesson: It's normal to feel vulnerable and weakened whenever you hit a setback, be it financial or non-financial. But don't try to go it alone if you don't have to as having support can be a strong catalyst for your recovery. Always make sure you are the one who stays accountable for the situation, otherwise you could be left with a feeling like you dumped your issues onto somebody else instead of being the one that actually overcame them.

Reflect and learn

Having a budget, setting up an emergency fund, investing for the future; these are all simply things that we do in order to improve our financial situation and ultimately our life. Therefore it makes sense to take the setback in stride and look back on it when enough progress has been made to recover and use the lessons to further improve ourselves.

Everything we experience is an opportunity to grow.

Not everyone will (hopefully) need to deal with aggressive tenants, represent themselves in court to convince a judge why the bad tenants should be evicted, and cover damages to the properties all while handling funeral arrangements and coming to terms with a family death. But there are many different unfortunate events that could lead to the same or similar lessons that I've covered in this article.

And they will make you and I even more prepared for the future.

It's unlikely I'll need to go through the same setback again but it would be foolish of me to assume that no other severe setback would ever happen again in my life, especially considering the amount of time I still have ahead of me. But considering I'm still here, still working towards financial independence, and closer than I've ever been before, I have no concerns that I will be able to get through the next setback whatever it might be.

The lesson: Use what you have learned to prepare for the next setback so that no matter what comes next, you are confident in your ability to handle it and stay on the path towards financial independence.

To Conclude

Everybody talks about setting up an emergency fund as though it's the ultimate panacea for financial setbacks, but when you really think about it all they really cover is a loss of a job for about 6 months or perhaps the car breaking down.

This is because most people haven't gone through a really severe setback themselves and they're all just copying what each other say in the first place.

I don't hope that you have a really bad experience in life that sets you back financially among other things, but I do know that there's a larger than assumed chance for it to happen if you have many decades left to live.

With my experiences and lessons here I hope it can give you a bit more insight into what you can do to get through a severe setback, so that you can put yourself back on the path towards financial independence despite the journey becoming slightly longer than it was before.

Don't lose hope; instead become encouraged in the fact that you got through it. It's proof that one day you'll make it to your goal no matter how difficult things become.


Don't wait for some magical number before you start "living". Life is full of surprises and you'll never be able to plan it perfectly. If you're doing sensible things with your money you'll eventually reach your goal. So start living now. The longer you wait, the less time you'll have. Money can be made, but time cannot. You are the barrier to the life you want to live, not a 4% safe withdrawal rate.

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