It was a Friday night in April. Somewhat serendipitously–but mostly because I was craving cheap drinks and potato skins–my boyfriend and I were planning to go to T.G.I. Friday’s for dinner. But first, I had to do my taxes.
The year before, I’d started my freelancing. I gradually transitioned from a full-time employee to a full-time freelance writer. Who knew you had to pay your own taxes? Not me, so I didn’t give Uncle Sam a dime that entire year, and, by the time I finished my taxes, I thought TurboTax was pulling my leg.
“I owe thousands of dollars,” I said out loud, to no one in particular. “There must be some mistake.” And there was: I took on a freelancing career without knowing jack about how taxes work. In one night, I drained my entire savings, my whole nest egg, which had taken me years to build. It was official: I was broke.
That was only 3-4 years ago. My finances are in better shape these days, and while I felt desperate and vulnerable at the time, it only took me about a year to rebuild and get back on my feet. Over at Lifehacker, I wrote about this experience and what I learned from it. You can read the full post for more detail, but if you drain your emergency fund or entire savings like I did, here are the basic steps it takes to rebuild.
Draft an Emergency Budget
After my tax mishap, the first thing I did was review my budget. Okay, that’s a lie: the first thing I did was go to T.G.I. Friday’s, because I was in denial. And I learned an important lesson: potato skins don’t taste as good when you know you can’t afford them.
After coming to my senses, I logged onto Mint, reviewed every spending category, and then I cut back. Mercilessly. Yes, it’s important to give your budget breathing room. But remember: this is an emergency budget, not a forever budget. It’s a pared-down, lifestyle-deflated spending plan that you’ll stick to during this stage of financial emergency. When you start saving and your situation gets a little more stable, you can gradually reinstate those pedicures and happy hours.
Until then, you need an emergency budget.
Related: How to Budget When You Have No Clue What You’re Doing
Seize Opportunities to Save
One major habit that helped me rebuild: I became laser-focused on finding opportunities to rebuild. Everything was a chance to save: cash back on credit card rewards, extra work, crap I could sell on eBay. I utilized my resourcefulness and looked for every chance to regrow my finances.
Tighten Up Other Safety Nets
Remember two paragraphs ago when I told you to make an emergency budget? There’s one expense you should absolutely not cut back on when you’re in emergency mode: insurance.
As tempting as it can be to ditch your renter’s insurance or switch to a high deductible, low premium car insurance plan, that can be particularly dangerous when your savings are at zero. Think about it: you’re already in emergency mode; another emergency could absolutely ruin you financially. If anything, now is the time to tighten up your safety nets. Make sure you’re properly insured and prepared for any other potential setbacks.
Related: How to Get Cheap Renter’s Insurance
Find Ways to Earn More
Easier said than done, I know. But the thing that helped the most in rebounding from my financial disaster was focusing on how I could earn more money. This includes:
- Asking clients and employers for more money
- Taking on side gigs
- Networking to find better jobs
I also started investing and maxing out my retirement and doing all the things you’re supposed to do in order to reach financial security. Three or four years later, I can safely say I’m financially secure and can have potato skins anytime I damn well please.
Related: A Beginner’s Guide to Investing Money
My experience is also a good reminder that Certified Financial Planners have a purpose. Had I consulted a CFP before switching careers, I could’ve saved myself a lot of headache. These days, I write and research money for a living, but I’ll still talk to a professional for any major life milestones. You never know how much you don’t know.
Photo: Rafael J M Souza.
So often people talk about building an emergency fund, but they rarely talk about *rebuilding* an emergency fund after you have to use it, and we all need to use it sometimes (hopefully not all at once though). This is great advice on how to do it, especially keeping your insurance active.
Thanks, Gary! It’s so disheartening when it happens, because you feel completely out of control of your finances. These steps helped me gradually regain control.
Good points, especially that it’s good to get some professional money advice when you have a major lifestyle change, especially starting a business.
Totally. Even when you think you’ve researched everything, it can’t hurt to sit down with a professional and confirm that you’re on the right track!
Great thoughts about an emergency budget v a forever budget. Usually our emergencies are small, so I don’t really think about the significant need to rebuild, but I can understand that.
I recently had my first oh shit tax experience. I was preparing for filing quarterly taxes when I realized that we would need to file for rental income too. Thankfully, we’ve been setting aside money for it, but my quarterly estimate may have been a little more “estimated” than it should have been. Thank God for CPAs
Yep! Nice to have a pro who knows how to deal with all the gritty tax details 🙂
Great post!
This is really inspiring. I know plenty of people that are broke and in debt, but they never take any steps like you did to get out of the situation. It’s a sad reality, but a lot of people just accept debt as a way of life. I’m definitely sharing this!
Thank you, Vic! It’s always been my biggest fear–losing everything and not having a financial safety net. This was a scary experience for me. Weird to think it wasn’t that long ago!
I had the same shock the first time I did my taxes after earning income from my blog, the self-employment part was what caught me. I was lucky in that I didn’t have any penalties, that would’ve made it far worse, but I had that emergency budget mindset too. I think knowing it was temporary made it palatable (plus I had the extra income from the business as a buffer too). It’s a good reminder that you never know where an emergency might come from, I never thought it’d be from taxes.
Good to know I’m not alone! Now it seems like the most obvious thing. You earn money, why you wouldn’t have to pay taxes on that? But back then it really caught me off guard.