When your income stops abruptly and unexpectedly, it can be difficult to know what to do. At a time when so few households have an emergency fund, knowing what to do when there is an income disruption can be the difference between making it through and piling up problems that will haunt you well after the crisis is over.
In a time of income crisis, I recommend focusing on three things: 1) Maximize income from all sources; 2) Minimize expenses to protect the four necessities; and, 3) Pile up as much savings as possible.
If you are already in crisis, this is what I would try. During a crisis you have few options. If you can see a crisis coming, you can take these steps in advance to pile up savings and prepare for the worst.
Two Sides to the Equation
As you know from my post about the Undetailed Budget, there is an equation that must be balanced every single month:
Income – Recurring Expenses = Personal Expenses + Savings
When income unexpectedly shrinks, then the other categories absolutely must shrink by the same amount. If you don’t reduce recurring expenses and personal expenses, then the entire difference has to come from reducing your savings. For many in an income crisis, the savings rate becomes negative, which means either dipping into existing reserves or going into debt.
If your income is in crisis, then you should create a Crisis Budget. Use these four categories to estimate what your finances will look like in the coming month. We’ll start with income.
When in crisis, it is incredibly important to have a plan. It can be scary to put down on paper what your budget will look like when your income is in crisis, but it will absolutely help. The anxiety from knowing how bad it is will be less than the anxiety from fearing the worst.
Estimate a reasonable income forecast from all sources during your crisis. Will you be working at your regular job at all? If so, how much?
Then, determine if you will be able to find temporary part-time work. It’s okay to take a temporary job outside your field. This crisis is not going to last forever, and we’re trying to minimize the impact on your finances. Any job will do.
Will you be eligible for Unemployment benefits? What about Food Assistance? Apply and find out! If the answer is yes, determine the amount and schedule for deposits and add it to your budget.
Can you start a side hustle? Every crisis is different, but there are almost always a few pockets of the economy that boom during a crisis. Delivery services, grocery stores, and hardware stores are great examples of industries that continued to hire through the Coronavirus (COVID-19) crisis.
Recurring Expenses and Personal Spending
During an income crisis, it is important to closely examine your spending. You need to determine the absolute minimum required to run your household. Start by reducing the cost of the four necessities: food, shelter, clothing, and transportation. Then, cut everything else to as close to zero as you can.
Four Necessities: Food, Shelter, Clothing, Transportation
Food: cook every meal from scratch. Eating is a necessity. Paying someone else to cook for you is not. Paying someone to bring it to your house is not. Apply for food assistance if you can.
Shelter: rent/mortgage (ask for a forbearance if necessary), utilities… NOT cable, fast internet, high-end phone bill, subscriptions. Look for ways to reduce these expenses. This is a great time to eliminate waste from your household.
Clothing: for most income crises, the clothing you already have will get you through. Wear what you have while you repair your income. Worry about buying new clothes later.
Transportation: keep your car mechanically and legally street-worthy. That means making payments, paying for insurance, and buying gas. Unnecessary repairs and maintenance can wait.
Cut Everything Else to Zero
Go through your bank statements for the last 3 months and find any subscriptions. Cancel anything that is not a necessity.
For everything else, make the minimum payment allowed. Call all of your lenders and ask them if they can help. Stay current, don’t break the rules. But find out what the rules are and do the minimum.
Don’t buy anything that is not part of the four necessities: food, shelter, clothing, and transportation. Survive on what you have.
Pile Up Savings
If you get through that exercise and you have any income left over from any source, put it in savings. Stash as much money aside as physically possible while you are in income crisis. Then, when it is over and you are back to work, you can restart your goals. Use any cash you piled up during your crisis to get current on anything that fell behind.
This may not work during the crisis. But, if you see a crisis coming and can get this going before your income drops, it can turn the crisis from an emergency into an inconvenience.
What to Avoid
If at all possible don’t break the rules. Stay current on debts, pay rent, don’t fall behind.
The goal is to make it through the crisis by reducing expenses. If you start breaking the rules and missing payments, then when the crisis is over you will face long-lasting expenses that don’t just go away. Your interest rates on debt may go up. Your credit score will decline, which will increase the cost of debts you get in the future. You may be charged fees and penalties. All of which is the opposite of the goal of reducing expenses.
An income crisis is no joke. It is scary. It may feel like your world is falling apart.
Every crisis is different. The external shocks to the system can come from anywhere.
But, every crisis is also the same. The way you get through is to buckle down, face facts, stay calm, and chart a path forward.
This crisis is unique… just like every crisis we’ve ever had. Since the Great Depression there has been at least one recession in every decade (1937, 1945, 1949, 1953, 1957, 1960, 1970, 1973, 1980, 1982, 1990, 2001, 2008, and now 2020). We’ve been here before, we’ll be here again.
But that also means there has been a recovery in every single decade since the Great Depression. There will be a recovery from this crisis. So, the best you can do is buckle down and minimize the long-term damage. Boost your income if possible, cut expenses to the minimum, and do the best you can.
I hope this has been helpful! I welcome your comments with your thoughts and questions. And, don’t forget to subscribe to the newsletter to get notified whenever a new article is posted.