A substantial reduction in income is a new experience for most people. And frankly, not a welcome one. When faced with a job loss, the fear of losing your income stream can be overwhelming. Start by considering your finances in a worst-case scenario – one where you're out of work for six to nine months. Perhaps you'll get a job sooner, but what if you don't?
When people feel trapped in a financial bind, they don't think rationally. The most important thing is not to panic. Take control of your finances by acting immediately. A financial plan gives you a way to develop a budget that can support you and your family during this time.
Here are a few valuable tips:
- Develop a six-month plan: Create an economic picture with a financial worksheet. Having a sound financial plan can give you the extra time you might need to land the perfect job, rather than forcing you to settle on the first offer. Your income loss will likely be less than you think if you have severance pay and unemployment compensation, and you may pay less in taxes.
- Make a household budget: Create a budget that includes fixed expenses (mortgage, property taxes, loans, credit cards, child support, etc.) and variable expenses (food, gas, recreation, car maintenance, household purchases, etc.).
- Identify your income sources: Your income sources could include: severance pay, unemployment compensation, savings, vacation pay, equity in your home, and cash value of insurance policies. Find out how much is in your insurance, retirement funds, 401K, etc., and how to access it. However, ONLY tap into these funds as a last resort. Apply for unemployment at the right time.
- Prioritize your expenses: List your expenses in order of importance. Your mortgage and utilities might be at the top.
- Assess creditors: List your creditors by name, account number, address, phone number, the amount owed, interest rate, payment schedule, and amount. Set a monthly payment you can afford and tell them if you need to lower it before you fall behind. Consider making a payment every month to keep your overall balance low and avoid turning your account over to a collection agency.
- Cut back: Take a few minutes to assess household expenses and cut back where necessary. If you have included many “extras" in your lifestyle, now is an excellent time to rethink their importance. Take the time to analyze what you need and change things that need to be changed. Do not panic.
- Time for fun: If possible, budget for some recreation and special treats to stay upbeat during this process.