Whether caused by lack of work, illness (yours or a loved one’s), or political stalemate, a reduced income can trigger immediate and substantial financial hardship. While personal finance professionals preach the wisdom of having a liquid emergency fund totaling three to six months of living expenses to help ease the financial burden of an emergency, such as unexpected income reduction or loss, such a recommendation can be challenging to follow. Indeed, one’s best efforts can be easily thwarted by delay or disruption.
Whether you have the recommended amount in your emergency fund, a partially funded emergency fund, or are without an emergency fund, one or more of these tips may be able to provide relief during a period of unexpected income loss.
- Stop Spending. Now. Just like a deep wound that needs a tourniquet to stem the flow of blood, the first step to save money is to stop spending. Period. Most periods of financial distress are a result of unexpected life events, such as divorce, unemployment or natural disaster—events causing significant stress and worry for reasons other than money. Take a deep breath. Cancel discretionary subscriptions and memberships, such as online newspaper subscriptions, BarkBox, and gym memberships. Brew your cup of joe at home. Forgo the Friday evening drinks and dinner with friends. And stop all other spending until you’ve read the rest of this article.
- Prioritize Payments. Of course, bills should be paid. But when income is reduced or eliminated, it is essential to prioritize which bills are to be paid first. Financial triage, if you will. First, make a list of all monthly expenses; second, think about what services are needed now; third, determine your necessary living expenses. If you need your mobile telephone to accept calls for potential work or because you have no other method of communication, then you need a mobile phone. Of course, needing a means of communication doesn’t warrant having the most expensive data plan or the fanciest phone. Have a car? Paying for the car, gas, and insurance may seem like priorities, but are they? Can you reduce your insurance premium? Perhaps, depending upon where you live, you’ll find you don’t need a car at all. Generally, must pay bills include payments for shelter (rent/mortgage and utilities), food, transportation, and mobile phone (if you don’t have another method of communication).
- Pencil a Plan. Now that you’ve paused and prioritized, pencil a spending plan (aka budget) based upon your income and savings. Keep it simple. Write down those bills you need to pay each month and calculate your total monthly expenses. Compare it with your monthly income, if any, or savings and determine how long you will be able to make such payments. If it doesn’t look pretty, keep calm and continue reading.
- Call your Creditors. Periods of temporary financial hardship are not uncommon—a fact well known by creditors. While the stress and uncertainty of current circumstances may make you feel embarrassed or angry, fight the urge to act like an ostrich and stick your head in the proverbial sand. Rather, prepare to meet your circumstances head on. Gather the contact information for your creditors—credit card companies, mobile phone providers, mortgage lender(s), landlord, bank, student loan servicer—and start calling. Explain your current circumstances and ask what can be done to help you get through this period. Make sure you record when you called, with whom you spoke (including the individual’s title, e-mail address, and phone number), and what was said. While you should avoid making promises regarding future payments, explore whether the company will waive late fees, reduce minimum payment amounts, provide a reasonable forbearance period, or temporarily reduce applicable interest rates. You may be surprised by the number of programs offered to assist individuals temporarily in need.
- Cull Community Resources. Local community resources are likely able to assist you during times of financial difficulty. This is especially true during times of local, well-known financial challenges, such as fire, flood or government shutdown. Banks, food banks, and local charitable organizations may provide additional resources for affected individuals. Lastly, check with your local government community resources agency, library, and community college for free computer and internet usage, resume writing and vocational classes, and assistance with family care needs.
- Ask for Help. While it may be difficult to do so, asking for help never hurts. Friends and family may be willing to provide you with money, be it a gift, an interest-free loan, or a loan with a reasonable interest rate. And if they are unable—or unwilling—to provide you with cash, they may be more than willing to provide you with free services, such as childcare or transportation. Local houses of worship, employers, and banks may offer emergency loans depending upon the circumstances. Before signing a promissory note, ensure you understand future repayment obligations, if any.
Financial challenges can be daunting, especially when faced with an unexpected and sudden loss of income. Like much in life, such circumstances likely will be temporary in nature. When your income is restored, don’t forget to revise your spending plan, check your credit report, and (re)build your emergency fund.