One thing that most people have in common is that they would never want to lose their income. However, as the possibility of a recession continues to make headlines, it’s easy to understand why people are worried. The reality is that people may lose their jobs, or their income may be affected. A company might cut pay, stop bonuses, or reduce expenses due to the uncertainty of the current financial climate.
For some, these concerns are new. For others, these concerns are something they’ve wrestled with as they’ve pursued their dreams.
This was my case, and the case for the entrepreneurial small business owners I work with, as we left making a good income to making $0 to pursue our dreams and a better life for our family, and generations to come. Additionally, I work with individuals in the entertainment industry who experience regular disruptions and gaps in their income as they transition between different roles and gigs.
Few things cause stress like a loss of income, which begs the question - what can you do when the paychecks stop coming in? As a wealth advisor, my role isn’t just to grow the balance of my client’s investments, but to also help them manage periods of uncertainty in all areas of their lives.
In this blog, I’m going to explain:
- What to do before losing your income. Preparing for the worst can help you to make even the most uncertain periods easier to manage.
- What to do after losing your income. Should the worst occur, there are practical things that you can do now to help.
What to do before losing your income:
1. Build a rainy day fund
The best thing you can do is prepare for the worst. My philosophy is to plan for the worst and hope for the best. This is counter to what I typically see where people plan for the best, and hope the worst doesn’t happen.
However, I can’t take credit as this isn’t a new idea. We get insurance to cover our health, our cars, and our belongings - so why don’t more people cover their income too? The best way to protect yourself is to adhere to the age-old saying “Cash is king.” Having an emergency fund that is readily accessible is one of the most effective ways to reduce the impact of a sudden loss of income.
I’m not talking about a physical stash of cash (please don’t start hiding it in a shoe box somewhere in your home), but simply a rainy day fund that you can access instantly. The general rule of thumb is that you should keep enough money aside to cover 6 months' worth of expenses. The reason I say 6 months is because it typically takes 3-6 months for people to find a new job.1 However, it could potentially be advisable to hold more or less depending on your own psychological makeup, which is where I find behavioral coaching comes into play.
When it comes to calculating your expenses, you can’t set the right amount aside if you don’t know what your expenses are. Most people know what they make each month, but they don’t have a handle on their expenses. So before you do part A (saving your money) you need to do part B (calculate the amount that you need to save).
To understand your expenses, start with your known expenses. This will be things like your mortgage/rent payments, health insurance, your phone bill, and any other fixed dollar amounts that you pay each month. Next, look at your essential expenses that fluctuate, like your grocery bill, utilities, and other key payments.
Once you’ve tallied all of this up, you’ll have an idea of what you need to survive without your income.
Try not to factor in pure discretionary expenses - which is anything that can live without, as these are items that you are going to want to delay or stop completely during periods of lost income.
2. Prepare a backup line of credit
If you own your own home and have done so for a period of time, I’ve got good news for you. Many Americans have a lot of equity in their homes at the moment – with the average homeowner having $300,000 worth2. As I touched on in a previous blog, you can access this equity through a Home Equity Line of Credit, or a H.E.L.O.C. This is a line of credit where the bank loans you back the equity that you’ve built up in your home.
The key is to set this up before you get into trouble because the bank will most likely not give this to you if you’ve lost your income. You aren’t necessarily getting it to use it, but to provide an additional source of a potential safety net. It’s like bringing an extra can of oxygen if one goes scuba diving. You hope you don’t have to use it, but if you do, you are extremely happy you have it!
This is just one example of a source of liquidity that you set up to protect yourself. These strategies can be effective, provided that you’re ahead of the game.
3. Reduce and minimize debt
Debt isn’t always a bad thing, but it can become a real problem when you lose your income. It’s important to have a good handle on your debt levels regardless of your income status. When organizing your debt, it’s important to prioritize the loans that have the highest amount of interest. The longer these are left, the more interest that you’ll have to pay. Furthermore, limiting debt helps to reduce the stress and pressure that you may feel if you lose your income.
What to do after losing your income:
So, you find yourself without your regular income. Firstly, stress kills, so please try not to get too stressed. I’ve personally found that everything in life happens for a reason, though we might not know the reason for 3-5 years down the road.
Whether you’ve established some emergency savings or not, there is plenty of steps that you can take to help yourself and your family. Outside of the obvious, such as applying for as many jobs as you can, or moving expeditiously on starting that new business, here are some tips to keep your finances above water.
1. Cut back on the small spending
Earlier, I mentioned setting aside funds to stay afloat. This money should only be used to cover your most urgent and important expenses. It’s time to cut back on luxuries until you have your income once again. A great place to start is with subscriptions. I’m willing to bet that you have more subscriptions than you need at the moment. When your income is coming in as usual, this isn’t as much of a problem. However, when your income disappears, these regular subscriptions can really eat into your emergency fund. Some of them may seem important (you do need some entertainment) but try to cut down on as many as possible.
Next, make changes to other areas of your discretionary spending. Try eating at home instead of going out as often. Think about canceling or pausing your gym membership - there are plenty of free exercise resources available online, and even the great outdoors. Small changes like this can make a big difference in your outflows and should help you to keep your head above water for longer.
2. Delay big expenses
When you lose your income, you need to reduce your spending - especially on larger costs. If you’ve planned a big vacation, you need to push it back to a different time if you can. This isn’t the time to take a break, you need to get your finances back on track. If you were thinking about getting a new car or any other large expense, put those thoughts to one side. All of these things can wait.
3. Take the time to Pause, Reflect, and Move Forward
As I mentioned earlier, I am a firm believer that everything in life happens for a reason. However, with the constant juggling one does when they have a full-time income, you may find it extremely difficult to pause and reflect on what truly brings you joy.
A core value of Julius Wealth Advisors is Passion. We all only have one life, and we need to live the life that we are truly passionate about. While not having an income can be anxiety provoking, look to harness this into long-term positive action. Turn this time into a fresh start to living the life you are truly passionate about. Build a concrete plan that might have you take a step back to take multiple steps forward. Your future self may thank you!
Although you can’t always predict a loss of income, you certainly have the ability to plan and prepare for it. Everyone’s situation is different, however, so it can pay to have personalized advice to ensure that you and you’re family are protected both now and in the future. To look to secure your finances and start building wealth for you and your family, get in touch with Julius Wealth Advisors today.
This piece contains general information that is not suitable for everyone and was prepared for informational purposes only. Nothing contained herein should be construed as a solicitation to buy or sell any security or as an offer to provide investment advice. The information contained herein has been obtained from sources believed to be reliable, but the accuracy of the information cannot be guaranteed. Past performance does not guarantee any future results. For additional information about Julius Wealth Advisors, including its services and fees, contact us or visit adviserinfo.sec.gov.
How Long Should a Job Search Take?- Flexjobs.com
Equity just hit a record high: $300K per homeowner on average- TheMortgageReports.com