When Your Income Drops

A sudden reduction in income can happen for many reasons and under many circumstances. Loss of a job, a serious health issue, or divorce leading to the loss of support from a spouse is serious blows to individuals and families that can make economical survival a struggle.

When you are faced with a reduction in income, take steps immediately to help cope with the situation. Talk with your family so they understand there isn’t as much money as before. Curtail spending. Flesh out a spending plan so you can pay your bills. Fine-tune your spending habits to keep your finances in check. The sooner you and your family adjust, the less difficult your financial problems will be.

If you lost your job

Losing a job sends most people into immediate panic. Don’t go to pieces! You’ll need a cool head to deal with the situation. With quick action and careful planning, you can still control your financial situation.

Your first step should be to file for unemployment benefits. Look in the “state government” section of your phone book – you should be able to locate a number for the unemployment office. Contact that number and ask where the closest unemployment insurance office to your home is located. Go to that office to file for benefits on the first day you don’t work. Make sure to take your Social Security card, your driver’s license or other state or federally issued photo identification, and the names, addresses and dates of the employers for whom you have worked for a minimum of the last two years. You will be given instructions on how to file an initial unemployment claim.

Unemployment benefits may not be enough to cover all your expenses, or you may not be eligible to receive unemployment. Contact your local Department of Health and Social Services. Programs are available for families needing financial aid (such as Food Stamps and Medicaid).

Talk with your family

A financial crisis is often considered embarrassing to the person facing it, especially if a lost job or divorce has led to the problem. Don’t try to hide this problem from yourself or other household members; it will only compound the problem.

Spending decisions affect everyone living in your household – spouses and teens especially - so it is important to communicate openly with them about the situation. Everyone needs to change how he or she spends money. Involve your family in setting spending priorities. When family members understand the hard choices that must be made and participate in making the decisions, they will be more readily able to cope with the situation and more willing to accept the decisions.

Examine your spending patterns

When money is in short supply, you must carefully manage the money you have to get the most out of it. You must immediately “tighten your bootstraps” to eliminate unnecessary spending. The situation might look grim, but you must think positively to set you and your family up for success. Your immediate concern is to survive financially and emotionally. Decide future goals later. You have to become accustomed to your reduced income, regardless of whether you will receive unemployment benefits.

First, you have to know exactly how much money you have coming in and going out. Determine your living expenses – rent or mortgage, groceries, utility bills (electric, gas, phone, water/sewage, garbage collection, television cable service), car payments, health and car insurance, installment loans, etc. The expenses left after you outline your living expenses are your “flexible” expenses.

Cut back on your spending

You should first eliminate nonessential spending. This includes vacations, eating out, new home furnishings, and other “luxuries”. The longer you remain on unemployment or a reduced income, the more you will need to cut back on other expenses, including basic needs such as food, shelter, transportation and medical care.

Set priorities for spending

Again, it is important to involve everyone in your household in deciding spending priorities. These decisions can be very tough and affect everyone, but the more your family is involved in the process, the more willing each person will be to accept the decisions.

Make a spending plan

Usually, the most difficult and time-consuming step of any financial planning activity is the first step – getting started. To create a spending plan, gather bills, bank statements, and income documents, a calendar, and the information you obtained when you examined your family’s spending patterns, priorities and goals. It may seem complex, but with some patience and discipline, you will be able to identify a plan and see it through. Once the plan is established, future tracking and record-keeping tasks will only take about an hour a week. You probably spend a lot more time than that watching television, and the time you spend on your finances will make for a much bigger payoff.

Now, find some paper and a pen and get down to the nitty-gritty of creating your spending plan. First, calculate how much income you will have to work with over the coming year. Note when it becomes available each month.

Next, you have to take a good look at your expenses. You need to evaluate whether your household is operating within its available income, how spending patterns can be improved, and where you can cut expenses, if necessary.

Think about these questions:

• Which expenses are essential to the family's well-being?
• Which expenses have the highest priority?
• Which areas can be reduced to keep family spending within its income?
• How much can you afford to spend in each category?

Make sure you eliminate all nonessential spending.

Contact your creditors

Most people hate the thought of talking to their creditors, especially when they are having difficulty paying bills. But when you don’t have enough money to pay all the bills, you need to contact the people to whom you owe money--your creditors--and explain your situation. Creditors understand when things go wrong, and will usually work with you to adjust your payments because they want their money.

Dealing with your current debts

Contact your finance company, bank, credit union and department stores about any revolving charge accounts or installment loans you have and explain your problem. Here are some solutions your family and your creditors might work out:

• Send smaller payments for a short period.
• Refinance the loan – in other words, agree to another contract for smaller payments over a longer period of time. You will probably pay more in overall costs for the loan, but your monthly payments will be smaller so that you can handle them.
• If you’ve tried all the other options, consider a consolidation loan. When you take a consolidation loan, you pay off all bills at once, and then have one debt and one monthly payment to just one creditor (usually extending over a longer period of time). Again, each monthly payment will be smaller, but you will probably commit yourself to an overall more costly debt for a longer period of time.

Use Savings

It may be necessary for you to delve into your savings to get you through this rough period. You also might be able to take out a loan. Your choice will depend on your individual circumstances, and there are some disadvantages to either choice (your savings amount will be reduced and will not earn as much interest, and you pay interest on a loan), but remember, you immediate goal is to survive financially for the time-being.