Lost Money in 2022? What You Need to Know About Losing Money

Losing money can be frustrating and difficult for a good reason: financial losses can jeopardise your future and goals. They can delay you from reaching your goals and simultaneously affect your mental health. So, how do you cope with money loss and bounce back?

Anyone can lose money. Even the best investors make mistakes sometimes. Whether prepared or not, you should be able to process your loss, learn from your mistakes, and create a plan to bounce back. To do that, you need to understand what caused the loss, how you can mend the situation, and what you should do to avoid future losses.

This article will explore everything you need to know about losing money and how you can pick yourself up when it happens to ensure you are back on track to achieve your goals. 

Read Also: The Fastest Way to Lose Money in Kenya 

Losing Money is a Common Experience 

Losing money is common. In Kenya alone, over 400,000 businesses fail every year. The ripple effects that causes are astronomical. Employees lose their incomes, suppliers are not paid, and business owners and their investors will likely suffer the most. 

The first step you need to take to start processing your loss is to understand how you lost money. Only then can you create an avenue of how to recover. There are multiple ways people lose money. Some of these ways are unpredictable and unavoidable; others are self-inflicted and caused by greed or ignorance. 

What are some of the common ways people lose money in Kenya?

Unforeseen expenses: Financial emergencies such as medical bills, funerals, increases in school fees, taxes, or cost of products, etc., are all types of unforeseen expenses that lose you money. If your kid's school fees are increased by 10%, but your salary isn’t, you will likely lose your ability to save.

Poor financial decisions: How you use your money can have grave consequences on your finances. Some poor financial decisions likely to lead to money loss include: giving out unsecured loans or cosigning a loan, borrowing from your retirement fund, not planning your purchases, etc.

Loss of income: This happens when you lose your job due to termination or retrenchment, lose your ability to work, your business fails, or retire.  

Investing in Risky Vehicles: Your risk tolerance plays a significant role in your investing decisions. Being too confident can lead to major financial losses, and being too fearful can lead to opportunity loss. Factoring in your risk tolerance allows you to strike a balance.

Fraud or scams: This happens when you fall for get-rich-quick scams like Ponzi and pyramid schemes, you become a victim of mobile money or bank card fraud, or you lose money when dealing with fraudsters to buy land, car, or other assets. 

Unexpected Events: This can range from disasters such as your house or business flooding or catching fire to thieves breaking into your home or stealing your assets.

Divorce: Relationship breakdowns can lead to financial losses in multiple ways depending on how intertwined your finances where and what the courts decide.

Read Also: 5 Events that Can Lead to Loss of Income (& How to Prepare)

Control your Losses 

Depending on what caused your money losses, you need to take steps to control the loss and get your finances in order. If you have a loss or risk mitigation strategy in place, this is when you should use it to reduce the severity of your losses. 

If you don't, you must take proactive measures to save yourself. It's crucial that you develop a well-thought strategy and not just react. If you have self-doubt, you should get an expert to help you.

Here are the steps you should take:

Understand the Risks

All financial decisions you make carry some level of risk, each of which will require different control plans. Understanding the risks will help you develop a plan. You can deal with risks to control your losses in four different ways.

Loss Avoidance: This strategy involves taking no action. Let's say you had invested in the stock exchange or bought some cryptocurrencies, but shortly after, the market collapses, and your assets lose value. You can either react by quickly selling them off or taking a hand-off approach and hoping the market corrects itself. This is the avoidance strategy.

Here's another example, your business hasn't returned any profit for the whole of 2022. You can react by selling it or closing up the shop, but instead, you avoid further losses by cutting expenses and investing more in marketing.

Loss Reduction: In this strategy, you take real-time steps to reduce and prevent future losses. For example, if thieves break into your business or home, you can prevent that from happening again by hiring security guards and investing in renters/homeowners insurance. 

When investing, you can reduce loss by diversifying and rebalancing your portfolio. These strategies will allow you to start fresh, and returns from your other investment will cancel out the losses you have already suffered. 

Read Also: 11 Money Mistakes to Stop Making

Loss Transfer: This strategy involves shifting the burden to another party. In most instances, it will work only if you have a loss mitigation strategy in the first place. The most common way to transfer losses is to have insurance or a contract that allows you to transfer losses.

For example, if your car was involved in an accident and had a comprehensive cover, you can claim your insurance, and your insurer will fix your car or offer a replacement. 

Loss Acceptance: Sometimes, you have to count your losses. Putting money into an underperforming investment or "buying the dip" doesn't always work. You have to think about all the possible results of your action. 

If, for example, you loaned money to a loved one, misappropriated the funds, and they don't have collateral you can repossess, you can decide to write it off as a bad loan. 

Read Also: 5 Ways To Cope With Financial Loss

Get Back on Track

Recovering from money loss requires patience and commitment. For example, you might have to cut expenses or revamp your lifestyle until you get on your feet. This can be discouraging, and you might be tempted to look for shortcuts such as liquidating your assets or borrowing from your retirement fund. However, you must consider the long-term effect that can have on your finances.

With that in mind, here are some steps you can take to get back on track and recover from your losses:

1. Evaluate your financial situation: Start by taking stock of your finances. This includes your income, expenses, debts, and assets. This will help you understand your financial situation and identify areas where the money losses caused the most damage. For example, did your income reduces, or did you get into debt?
2. Identify your financial goals: You need to ensure that your long-term financial goals haven't been affected and if they were, create a plan to get them on track. Identifying your financial goals can help you create a plan that aligns with your priorities. Your goals will also decide the types of investment you choose and how risk-averse you need to be moving forward.
3. Increase your income: One of the best ways to get back on track after experiencing losses is to increase your earnings. You can start a side hustle such as freelancing or consulting, negotiating for a raise or promotion at your current job, leveraging your passions and talents to develop passive income, etc.
4. Develop a debt repayment plan: Did your loss leave you in debt? Maybe you took a loan to start a business and failed, or you took money from different lenders to try and salvage the situation, but it didn't work. Depending on your needs, this may involve consolidating your debts, negotiating with creditors, etc.
5. Seek support: Losing money can be emotionally challenging. It can be helpful to talk to a friend and family member about your experience and get emotional support as you work to recover from the loss. You should also consider talking to people who have previously encountered a loss like yours. They can help you avoid pitfalls and create a solid plan to get you on track.
6. Hire a Financial Expert: If you're having trouble developing a plan on your own, consider seeking the help of a financial planner or credit counsellor. They can provide guidance and support to help you get your finances back on track, how you can invest, and, importantly, how you can avoid losses in the future.
7. Control your Emotions: When you involve emotions such as fear or greed to salvage the situation or recover faster, the opposite will happen. Applying emotion to your recovery plan can set you up for even more financial problems. Instead, consider taking time to cool off and create a plan when you are clear-minded.

Read Also: 7 Money Moves you Should Make Before the End of the Year 

WRAPPING UP

Losing money can be frustrating, but it can also be a learning opportunity. Once in a while, you will make bad decisions or financial mistakes, leading to money losses. Instead of beating yourself up, approach it as a learning opportunity. Losing Money can teach you valuable lessons like researching investing instruments before investing and the importance of being financially informed. It will teach you how to always have loss mitigation plans in place and recover in the future. 

To avoid losing money in the future, you should take steps to protect yourself. Have a solid emergency fund, consult financial experts before making risky decisions, be aware of all potential scams, and always deal with legitimate people. The best way to protect yourself is to be cautious and always weigh the pros and cons before committing your money anywhere.