Laura Rowley Money & Happiness

The bubble has exploded. Now the pain begins.

There's plenty to go around -- from the investors near or in retirement who placed large bets on a handful of stocks; to the "Rage of the Previously Rich," as New York Magazine dubbed a laid-off Lehman Brothers trader; to the ordinary Americans who saved their cash, shunned debt, and never participated in the upside of the bubble -- and are now being dragged into a massive investment in toxic financial instruments by their government.

Lifelines in a Flood

What do you do when financial catastrophe leaves you bitter, angry, guilty, or scared out of your mind?

Start by realistically assessing the damage, says Stephen Pollan, a New York attorney and consultant and co-author of "Lifelines for Money Misfortunes: How to Overcome Life's Greatest Challenges." "Take inventory -- often we don't recognize where we are financially because we don't know what we're spending and never measure that against what we're making," says Pollan, who faced his own personal trauma after contracting tuberculosis in his 40s and spending a year out of work.

Get a handle on your net worth, tally your spending and debt, and assess your investment risks -- but don't waste time ruminating on your mistakes, suggests Pollan. "That's like an alcoholic who wants to give up drinking but first wants to find out why he drank," he says. "Get out from between your ears and look at things as they actually are. Sit down and verbalize your fears. The big thing behind procrastination is fear -- and once you take action, the fear goes away."

Fight, Flee, or Play Possum

Get objective help to review that plan of action, says Dr. Brad Klontz, a financial psychologist in Hawaii and co-author of "The Financial Wisdom of Ebenezer Scrooge: 5 Principles to Transform Your Relationship with Money." "We are biologically programmed to respond to stress in three different ways: we fight, we run away, or we freeze," he notes. "They can have dire consequences to our financial health."

Those who fight will blame an unfair system, predatory lending practices, short sellers, and the like, says Klontz. "Some will call their financial planners and complain or threaten to sue, others will gamble on the next big market trend." Those who choose flight might pull all their money out of the market, which is rarely a good idea, since it locks in losses and forces you to arbitrarily choose when to re-enter the market.

"Many others will feel overwhelmed and take no action whatsoever," says Klontz. "They go into denial about the problem and freeze -- they ‘play possum.' They avoid opening their investment reports or bank statements. They avoid watching the news and disregard or ignore recommendations from financial advisors."

Conventional Wisdom Remains Wise

Instead of fight, flight, or freeze, find a fee-only financial planner or other professional you trust to help you review your goals, time frames, asset allocation, and appetite for risk, and set up some financial rules of the road going forward.

(I know this advice is so often repeated that it sounds like a cliche, but it works, and bears repeating -- because if everyone did it we wouldn't be in this mess. When things go south, a diversified portfolio leaves you significantly better off than market timing, putting all your assets in commodities, or gambling on the market sector of the month.)

"There's great catharsis in saying ‘look at those jerks on Wall Street' -- but no hope for change if you're not acknowledging the choices you made and asking yourself why you did what you did, and what you were hoping to gain," says Klontz. "That's where the opportunity is."

Building Character a Dollar at a Time

Jaimie, a married mother of two in the Midwest, writes about the changes she's made in both her finances and her attitude on her blog I've Paid For This Twice Already. When she launched the blog in June 2007, she and her spouse had about $36,450 in debt -- student loans, car loans, and credit cards they relied on to survive when his employer went belly up. They had to relocate for his new job, which paid 20 percent less than the old one. (Jaimie, who has a Ph.D. in genetics, works part-time.)

Over the last 15 months, she and her spouse have whittled the total debt down to $15,000, and expect to be debt-free (except for their mortgage) by 2010. The episode has been painful, but valuable. "Paying off debt has been character-building in that it's made us more self-reliant," she says.

"For a long time it just felt like things happened and you kind of dealt with it and moved on, but now we actually have a lot more control of our destiny," Jaimie continues. "I'm more confident about being able to live within our means, manage money, and save money."

Attitude Matters

If you're confronting significant losses, think about what you really need and the purpose of money in your life. This is the advice of Rabbi Benjamin Blech, a professor at Yeshiva University in New York and author of "Taking Stock: A Spiritual Guide to Rising Above Life's Financial Ups and Downs."

Blech, 75, wrote his book after he turned his $50,000 nest egg into $7 million by investing in technology stocks during the last boom -- and then lost it all. "It was total devastation," he says. "I had to deal with it by studying what philosophers said and incorporating it into my life as therapy because I couldn't afford a therapist. I found great courage and understanding from what I went through."

Blech says surviving financial catastrophe starts with regaining faith in yourself. "You are what you are, not what you own," he says. "People invest their entire personality and self-worth into their possessions. I'm not someone who says you shouldn't strive for money; you can accomplish wonderful things with it. But self-worth is not the same as net worth."

Don't wallow in remorse or shame, he adds. "The most expensive trip in the world is a guilt trip," says Blech. "I had to say to myself, ‘I'm human, I can make a mistake -- that doesn't mean I'm a failure.' One of the ways we mature is to overcome difficult times. There's all the difference in the world between saying ‘I failed' and ‘I am a failure.' What defines success is our attitude -- how we respond to where we are."

Bad Things, Good People

And what about the people who did the right thing financially during the recent orgy of debt, who didn't cash out their home equity and live it up -- and feel betrayed by the bailout? Obviously, they can email their representatives and senators and tell them how they feel about a $700 billion bailout. But what do they do with their anger and frustration, with their feeling that no good deed goes unpunished?

"The response should be the recognition that life is not fair," says Blech. "That's reality. I am not a sucker if I do the right thing and in the end I get screwed. I did [the right thing] to be the real me, the person I wanted to be. It certainly is better than to allow the world to turn me into something I don't want to be."