What To Do When Your Income Drops – Part I

What to do when your income drops.

A loss of income is traumatic, whether it is the breadwinner or a second income – a bad few months or even a year can destroy your family, your credit, and your finances. The good news is there are some steps that you can take to minimize an unexpected loss of revenue.

The very first step is to be honest. Be truthful with yourself and the place that you are in. Do not stick your head in the proverbial sand. You will survive and in fact you will be stronger because of it. I know when my wife and I were in the process of financial meltdown we both went through a time of freak out, but you cannot stay in that mode. You have to shake the dust off and put together a plan of action. This begins with honesty.

The next step is to communicate with your family. If you are married then sit down with your spouse. If you have children then call a Family Meeting. When it comes to your kids it is important to assure them that everything is going to be okay, but that the family is going through a rough spot.

I would recommend including them in some of the budgeting phase (we will go over that in a moment) so they can appreciate the fact that you are not going to be eating out anymore and that the Saturday shopping sprees are on hold for the next few months. I coached a lady who refused to let her two teenage kids know that they were going through a rough time. She attempted to maintain their lifestyle even though they we losing everything. She would get very angry at her kids every time they would ask for money.

On the flip side, I would not recommend hanging out all your dirty laundry to your kids. Especially if you feel like you can turn it around quickly. In other words, use good judgment. Above all, do it with kindness and love. Explain to them that stuff comes and goes, but that they will always be a family. Family can go through anything and be okay just as long as they are together.

Step 3 is take inventory of your financial situation. The first thing I would recommend is to take a look at your credit report. This will give you a snapshot of your debts and open credit lines. It will also let you know what your credit score is from all three credit bureaus. My wife and I recommend a service through Credit.com – it is only $14.95 and that includes all three credit bureaus with scores. It is a good deal. Once you have pulled your credit you need to analyze it. This is very easy with Credit.com – you can print it out and go over it.

The first thing you want to do is write out all of your monthly bills in the form of a budget. Now calculate your bring home income (after taxes). So, how bad is it? If you have a significant shortfall – which I am sure you do since you are reading an article on your income dropping then we go into the Action Plan phase.

 If your income gap is negative, you’ll have to start cutting expenses and get your payments reduced to balance your budget.Determine where to cut corners to balance your budget and reduce spending, you have to know exactly how much money you have coming in and going out. 

• Stop spending leaks. Leave credit cards at home and pay in cash. Using a credit card to maintain current living standard is incurring high interest debt and is adding to, not resolving, your problems.Change eating habits. We spend 14% of our income on food, and more than a third of that in restaurants, on fast food, and vending machine snacks. Eating at home or bringing your own homemade lunch or snacks is a lot cheaper.

• Conserve utilities. Turn off the lights and the television when not in use. Run the dishwasher, clothes washer, and dryer with full loads and less frequently. Lower house thermostats in winter and use fans instead of air conditioning in summer.

• Communicate. Agree with your family that every purchase over a certain amount will be brought to the family for discussion prior to purchase.

• Plan. Prepare for upcoming bills, such as an insurance payment due twice a year.

 • Make lists. Weigh the importance of each item on your shopping list. Reduce the number of shopping trips.

• Explore entertainment alternatives. Disconnect cable TV; play board games or visit the library. Walk more.

Take an inventory of your resources

How much does the family own? Take a few minutes to add up your family’s assets—the result just might boost your spirit. Add up the total value of all your belongings on Worksheet #2 (next page). Remember to calculate everything owned at current market prices, not the original price.

Cash—those things that either are or can be easily converted to cash. Remember: Cashing in certificates of deposit (CDs) before they mature results in an interest penalty.

Marketable assets—financial assets that can be cashed in or sold for their current market value. Prices will fluctuate with market conditions.

Other assets—real estate and personal property that can be sold but usually not as quickly as the assets above. Assets such as vehicles, furniture, and appliances usually depreciate in value, so they are worth less now than when you purchased them, even though they are still in good condition.

Non-marketable assets—assets that cannot be sold or are more difficult to turn into cash. Withdrawing money from your retirement plan, pension, or Individual Retirement Account (IRA) before age 59 1/2 usually involves a substantial penalty.

Use savings – If cash is required, use emergency savings or take out a loan if you can get one. This will depend on your individual circumstances, but there are some disadvantages either way. When you take money from your savings account it will no longer earn interest. If you take out a loan, you pay interest for the privilege of using someone else’s money.Check into a secured loan based upon money you have on deposit in a savings or a certificate of deposit account. You will pay interest on the loan, but the total cost might be less than the interest on another type of loan. If your family decides to withdraw money from a savings account, take money from a regular account first and leave any certificates of deposit untouched. You’ll lose interest and may have to pay a penalty on the certificates if you cash them in before they mature. If any case, think carefully about taking on any additional debt until you get back on your feet.

Should you use retirement savings? Don’t be tempted to start spending what you put away to use in retirement for everyday living expenses without some careful consideration of the long-term consequences.   And remember, under the tax rules, you must have your company deposit the money directly into your IRA rollover account at your new custodian—a bank, brokerage firm, or mutual fund.

If you take possession of the check—even for a few days—the company must withhold a sizable amount for income taxes.  But perhaps you truly need some of this retirement savings in order to meet some current bills. Prepare for this by rolling your 401(k) into an IRA invested in a money-market mutual fund or a bank money-market deposit account. Use this money only if your other savings run out.

You’ll pay taxes and penalties on the money withdrawn. But as soon as you find work, you can stop your withdrawals and protect any remaining IRA money left.  Some 401(k) plans let you borrow from retirement savings. There are rules about how much you can borrow, the interest you will pay, and the deadline for repaying the loan. For a short-term financial need this can be one way to borrow money quickly and without a lot of paperwork. 

Stay Tuned for Part II