How to prepare for a sudden drop in income?
Are you ready for a sudden drop in income? Is anyone?
Money habits, their effects and solutions are the same wherever you are in the world. Yes, we should all live within our means, not borrow on credit cards or have loans for cars. Oh and 6 months’ worth of income in savings in case of emergencies. But the reality is very different. We all hope for the best. A plan for the worst is all you need.
What do I mean by a sudden drop in income?
We all go through life doing our best, for ourselves and our families. Hopefully you will be one of the lucky few where there is nothing but good things round every corner. We can all hope for the best but sometimes life just throws us a curve ball.
In our lives we may have to deal with redundancy, job loss and medical issues, all of which can cause our income to half, sometimes overnight. When I got a bad back on holiday 4 years ago, little did I know that I would not be able to work for 6 months, still my physical ability often limits how much I can work.
You may want to start a family – wonderful, though a big drop in earnings with time off work. As we get older, we have ageing parents who need us. There will always be times when we must put our health and our family before working.
This is where you need a plan.
If you are financially prepared, then that’s a huge burden off your shoulders. You can concentrate on the issue whether it be health, job or family. You do not need the extra stress of money worries, just put your plan into action, knowing you will get through this and come out the other side.
So what’s the plan?
Well there are a few steps. Look they may be difficult, you may be burying your head in the sand, you kind of know your situation isn’t great. But this is really important. Do not put it off. Make an appointment with yourself in the next couple of days. 1 hour, that’s all it will take. One hour, then you will have clarity. You will have an actionable plan.
Right get your bank statements out, or your online banking open and write down everything you spent last month. In a list. No one is judging you, this is for your benefit only.
Now ask yourself. If I had no income tomorrow, what would I still HAVE to pay? Look at your list again with this thought in mind. Highlight those expenses. Total them up. Add 10 percent. That’s your figure.
Ask yourself could you cover those expenses. If the answer is yes, then fab, you can follow the steps below for a fun way to add to your savings. Most likely the answer is no. That’s ok, breathe, it’s much better to face this now, by choice than when you need to. How much is the shortfall?
The position you want to aim from step 1, have one month’s expenses emergency fund saved and reduce your monthly expenses by the shortfall from step 2. Look at your expenses and see where the biggest problems are. Look at this as a challenge. Approach it as if this really was necessary now. Everyone’s situation will be different but here’s some guidelines.
- Pay off credit card debts and loans. Do not add any more debt. Start now by putting every spare dollar towards these debts. This may take months, so the sooner you start the better.
- Finance. Look at other options, what if you couldn’t pay that hundreds of dollars car finance every month? What would you have to do? Could you do that now?
- Subscriptions and memberships. If they are 1 month notice cancellations then fine, cancel when you need to. But keep in mind the tie in period when it comes to renewing (like gym or phone contracts).
- Grocery bills.This is a huge household expense that’s so easy to cut back on so have some fun with it now. When we need to cut back we have a weekly $10 freezer / pantry challenge – that’s no shopping, we just make do with what we already have, with just $10 to spend. We take it in turns (Me, Mr D and the boys) so by week 4 there’s some really odd and interesting dinners.
- Holidays and activities.Book refundable holidays and activities, they are usually no more expensive. That way you are prepared if necessary, without having the double blow of cancelling the holiday and still having to pay for it.
- Spend Smarter. Make use of all the loyalty schemes, coupons and discount vouchers and freebies. This is a fun hobby too and no longer ’embarrassing’ in fact paying full price for anything is considered bonkers over here. Air Miles, cashback websites and discounts will save you hundreds.
- The best things in life aren’t things. Time is priceless. You have enough stuff. Go and enjoy all the free activities with your loved ones. Enjoy the moments.
Why do I need to do this now?
Addressing this now, when it is a choice means that you can look at the situation in a calm, relaxed way with a clear head and make the necessary financial plans with control and focus. It will take time to get to the totally ready position, that’s fine. Taking the first steps, working towards the $ Emergency fund and manageable plus cancellable monthly costs will give you a goal and each month you will see the progress.
Having to do this IF disaster strikes while dealing with stress and panic is not worth the risk and is easily avoided. Do yourself a favour and make that appointment with yourself now.
Have a target and keep a monthly tracker, it’s really satisfying seeing yourself make each step towards your goal.
Let me know how you get on. Good luck.