How to rebuild wealth after a substantial loss

Regardless of the cause of a substantial financial loss, how you respond - and how quickly - will have a huge bearing on your financial wellbeing for the rest of your days.

Financial losses are sadly a common part of modern life. They are widespread, can take many different forms and impact people in different ways.

They can - and do - happen to anyone, anywhere, anytime. For instance, insurers paid out $36.5 billion in claims last financial year and Australians lost over $2.74 billion to 601,000 reported scams in 2023.

While prevention is best, recovery is possible provided that it is based on prompt, decisive and well-considered action.

1. Secure against further losses

The first step is to ensure your losses don't multiply.

If you're the victim of a fraud or scam be sure to secure passwords, bank cards and accounts against repeat attacks. If you've been impacted by a failed investment review your exposure across other investments and make necessary adjustments.

Going through a divorce or separation? Know what is in your joint asset pool and resist being pressured into settling for less than your fair share.

It's also worth considering your future living costs as a newly single person. For example, don't sacrifice cash and liquid assets for the house if you won't be able to afford its upkeep and any mortgage repayments on one income.

2. Leverage protections

You (should) have protections, safeguards and back-ups in place in case disaster strikes. A substantial financial loss is such an occasion, so now is the time to use them.

For instance, an emergency fund offers readily accessible cash to cover short-term outgoings while insurance claims may cover property damage, lost income, or business interruption.

Tap into your support network too - if you can - to protect your mental and physical wellbeing from the stress associated with financial losses.

3. Safeguard cash flow

Cover the shortfall in sustainable ways that don't compound the initial loss. That means avoiding high interest debt build-up such as maxing out credit cards, accruing buy now, pay later liabilities or taking on non-essential loans.

Also, avoid the temptation to bring forward director's loan repayments if they will adversely impact business cash flow.

4. Rebuild finances

With all the aforementioned steps in place, now you can look to rebuild and recover.

How you do so will depend on several factors, including your age, the sum of your losses and the cause. However, common steps to work through include:

• Review protections: Implement safeguards to cover any gaps.
• Restore your emergency fund: Using your fund once should demonstrate how valuable this resource is in a crisis.
• Reduce spending: Conserve cash to aid your recovery. Short-term spending cuts may also develop more favourable financial habits over the long term.
• Diversify investments: The more concentrated they are, the greater the impact any future losses could have.
• Optimise risk weightings: Investments may need to be more aggressive to recoup funds, or more conservative to safeguard what remains.
• Implement written agreements: For example, business or partnership contracts, prenups for second marriages, loan agreements for Bank of Mum and Dad borrowings.
• Unlock equity: Unused equity in your home, investments or business could be put to work to recover losses faster.
• Adjust retirement expectations: Bring in additional income by delaying retirement or planning to transition to part-time instead of making a clean break.

5. Get reputable advice

Many losses could have been avoided had it not been for bad advice or a complete lack of it.

Thinking you can forgo legal, accounting or financial advice to save money can be an expensive mistake. So too is relying on "free" advice from family, friends and colleagues who, while meaning well, are unqualified and speak from their personal circumstances, not yours.

In fact, the right advice may be able to help you navigate relevant assistance options and even recover some or all of the financial hit, in addition to assisting you to rebuild and grow your wealth.

6. Learn from the experience

The best investors use losses and failures as learning experiences. Learnings may include the need to strengthen protections, adjust strategies, acquire additional skills and knowledge or avoid repeating mistakes. Remember: once bitten, twice shy!

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