Budgeting After an Unexpected Loss of Income
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Panic is a natural reaction when your income ceases or drops drastically, through illness, job termination or any other event that results in less income. Responding quickly is not only essential to make the most of your remaining resources, but it also gives back control at a time when you may feel you have none. A focused, methodical budget plan takes the pressure off as you get over the temporary loss-of-income hurdle.
Take a Complete Financial Inventory
The first step in creating a survival budget is to make a complete and honest tally of all your expenses and any remaining income. This includes expenses that you once paid with pocket change with little thought when your regular income was flowing.
Include all major monthly expenses and don't forget bills you pay annually, such as insurance or property tax, for which you may need to save regularly. Develop an accurate picture of what you take in and what you spend, since it's from this big picture that you'll devise your budget and look for savings. If this sounds like a whole lot of work, use a free budget calculator to help you get started.
If you know of any severance, unemployment or other payments you will receive, include these in your plan, but don't wait for them to start coming in.
Cut Back to the Bare Bones
The bare-bones budget concept targets discretionary spending while focusing on fixed expenses. Mortgage or rent, car payments and utilities, for example, must be paid each month.
Discretionary expenses can be modified. For example, enhanced movie packages on your cable service can be cancelled to reduce costs. Taking a second car off the road temporarily will save fuel, maintenance and insurance costs in the short term. Some utilities offer budget billing where seasonal costs are balanced over the year. If you have not yet taken advantage of this, it can redistribute your utility bill and possibly free up some short-term cash.
Some bills can be eliminated altogether. If you're hanging on to a landline phone, cancel it, so cellphones are your only phone expense. If your income interruption is for a known duration, use vacation service interruptions for landlines or cable services, if you can temporarily do without.
Look at every expense, even fixed bills, to see if there is a way to reduce the usual amount you pay.
Create Alternate Cash Flow
Getting a part-time job may be an alternative as you job hunt, but if loss of income is a result of illness or some other event that makes working impossible, more creative cash-flow alternatives must be found.
If you've been thinking about selling your unwanted furniture or appliances, now is the time to turn these items into cash. While selling for cash is ideal, don't forget that you can donate many items in return for a tax write off, which could lower the tax you owe or increase your refund come April.
Use Your Emergency Equity
While increasing your debt load is not an ideal solution when you lose a job, you may have built-in reserves that can temporarily bridge shortfalls. A homeowner's line of credit, for example, can provide a financial cushion, usually at interest rates below that of credit cards.
You may be able to borrow against the cash surrender value of a life insurance policy, essentially loaning money to yourself at low interest rates. This does reduce life insurance coverage somewhat, but repayment is flexible, making it a potential resource in a crisis.
- Bankrate: 15 Tips to Survive a Job Loss
- Monster: Laid Off? Six Steps to Manage Your Finances
- The Simple Dollar: How to Create a Bare-Bones Budget
- Central Penn Business Journal: Five Tips to Prepare Financially for an Unexpected Loss of Income
- 360 Degrees of Financial Literacy: Life Insurance Policy Loans -- Tax and Other Implications