With layoffs on the increase and the national job market on unsteady feet, our financial futures can sometimes seem uncertain. When employees get laid off, too often it takes a week or two to get a psychological handle on the situation, which means that, financially, it may be too late to adapt.
Once you have a spending plan (budget) in place for your current situation, it’s time to create a “Back Up Budget,” a plan you could put in place should you ever lose your income or have your income reduced. Your Back Up Budget helps you prepare to pay for your basic needs and high priority wants with any severance package or savings plan you might have.
Here’s how to create your Back Up Budget:
1. Consider what sort of “Survival Resources” you’ll possibly have in order to fund your budget. It could include:
- Savings: Ideally, we should have 3-6 months of survivable expenses available to us in savings accounts, certificates of deposit, money market accounts, and other easily accessible funds.
- Unemployment: Usually just 50% of your recent income for up to six months. Remember, though, that you probably will not qualify if you initiate the termination yourself (i.e. you quit rather than you are let go).
- Severance: Sometimes 2 or 3 months of salary, though there is certainly no guarantee of receiving anything.
- Disability: Approximately 60% of your salary for about six months, if you qualify.
2. Decide which expenses you could live without in a pinch”
- Generally these will include cable/satellite TV, movie rental club, entertainment, dining out, debt payments beyond the minimum requirements, children’s activities, tobacco, alcohol, lattés, gift giving, charity, etc.
- If you have children and are paying for day care, look at reducing or eliminating this expense until you are employed full-time again.
- For pet expenses, eliminate the gourmet pet food and “play toys” and reduce the veterinary visits. Take advantage of being at home to spend more time with your pet(s).
3. Add up you survival expenses, which include:
- Mortgage: Contact a HUD-Certified housing counselor if you lose your job. They can help you find repayment programs and options while you’re without income.
- Utilities: Get on level pay with your utilities to make your budget more predictable.
- Groceries: Aim for $100-$125 per person per month. This does not include dining out.
- Insurance: Consider raising your deductible to lower your premium. Also, consider COBRA health insurance coverage, since the 2009 Stimulus Package may cover up to 65% of the premiums if your employment is involuntarily terminated.
- Clothing: While between employment, check out thrift stores for necessary clothing.
- Prescription Drugs: Consult with your doctor to see if there are alternatives or generic versions that may cost less.
- Transportation: Consider downsizing if necessary
4. Compare your new “Survival Expenses” with your “Survival Resources” to determine how long you can afford to continue in such a survival mode. If your resources are too thin, endeavor to put more away into a savings plan now while you have income.
5. Finally, avoid the temptation to raid your retirement funds. IRA’s 401(k)s and other accounts can often be accessed, but these actions carry stiff penalty fees.
The single biggest financial mistake people make when they are laid off or otherwise lose their current income is this:
Failure to Adapt Quickly to their new Reality
Creating a Back Up Budget will help you be ready in case of income reduction or elimination. Taking an hour or two to prepare one might save your financial life.
If you have any questions, would like to discuss your financial challenges, or are just looking for advice, please call us at your convenience. As always, we are here to help and look forward to hearing from you.