How to Recover From a Financial Setback

Even if you are content to rent for the rest of your life and never plan to own a house or condo again, one way to bounce back from foreclosure is to rebuild your savings by building a "rainy day" fund and an emergency savings account. Otherwise, it may seem like you can never get ahead or achieve financial stability.

A rainy day fund is a small savings account, typically between $500 and $1,500, that can help you deal with unexpected expenses — like the flat tire on your car or the leaky toilet that forces you to call the plumber.

Without a rainy day fund, you're forced to constantly use credit cards to pay for short-term expenses or one-off emergencies. And since your credit has already taken a hit after foreclosure, overusing your credit cards, which also hurts your credit, is the last thing you want to do.

(See After any financial blunder: Build an emergency fund, on Page 3, for information on emergency savings accounts.)

After credit woes or major investment mistakes: Seek professional help

Nothing can deal a bigger blow to your confidence — and your finances — than making a major investment mistake. Whether it's watching your 401(k) go up in smoke, investing in a relative's business that goes belly up or simply picking a series of investment dogs, it's no fun watching your investments fail.

If you're just baffled about how to best manage your retirement assets, consider setting up a meeting with a financial planner or a financial adviser. You can find specialists and experts in your area via the Financial Planning Association and the National Association of Personal Financial Advisors. Both are reputable groups with professionals who can evaluate your situation, help you create a financial plan and guide you toward your financial goals after a setback.

If budgeting blunders, credit issues and debt problems are plaguing you, seek assistance from a HUD-certified, nonprofit credit-counseling agency.

After divorce: Reestablish credit

Divorce can be a nasty matter, both emotionally and financially. But once the dust settles, you can recover from this setback, too.

From a financial perspective, you'll need to reestablish credit in your own name after a marriage breakup. To find out where you stand, get your credit reports from the three credit bureaus — Equifax, Experian and TransUnion — via the government-mandated site, AnnualCreditReport.com. If you spot any credit errors, write to your creditors or the credit bureaus and dispute any mistakes.

To ward off other credit problems, get rid of all joint credit accounts you had with your former spouse and be sure to pay all bills on time to try to maintain your credit rating postdivorce.

If you don't have much credit in your own name, you might want to apply for a secured credit card, which requires you to pay cash upfront for a credit line. For those who have credit problems like bankruptcy, you may find that certain banks are willing to offer you a regular unsecured credit card fairly soon after your bankruptcy is discharged — primarily because lenders know you aren't eligible to file for bankruptcy protection again for years.

After any financial blunder: Build an emergency fund

Besides building your rainy day fund, it's also wise to start accumulating a larger emergency fund. This separate savings account should be between $3,000 and $10,000 in size — or even bigger.

Unlike a rainy day fund, which helps you recover from a one-time setback, the purpose of an emergency fund is to tide you over during a long-term personal or financial crisis, such as when you get a pink slip or go through a divorce.

An emergency fund can also be your saving grace after any kind of major financial blunder — a business deal gone bad, a large loan to a family member that wasn't repaid or even a costly financial scam. The emergency fund should have enough money in it to sustain you for three to six months. Because this fund should be sufficient to cover all your bills during that time period, it obviously takes time to build such assets.

So for this year, why not set a goal of building up an emergency fund by saving either a percentage of your paycheck or a base amount of any income you're getting, such as a pension or Social Security check?

By committing to building an emergency fund and making savings a priority, you put yourself back on the road to financial health. You'll also be safeguarding your future well-being in case you find yourself in need of cash to cover another unplanned setback in your life.

Ultimately, it's important to know that any financial setbacks you've experienced in the past can be overcome. And it doesn't have to take forever to get back on track.