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Are You Financially Prepared For Job Loss or Salary Reduction?

July 16, 2011 · 17 comments

in Personal Finance

Imagine the following scenario:   You are living a comfortable, middle-class lifestyle when all the sudden, the company you work for is bought out and your entire department is eliminated.  What do you do?

I am guessing the first thing on your list after sharing your anger is to refine your resume.  Next, you might head to the unemployment office.

Suppose now that you are 2 months into unemployment and your emergency savings are gone, what next?

Ideally, that last stage would not happen because you either quickly procure another job, or, you would have a large sum of money saved up to help get you through rough spots.   However, saving is not the only part of the equation when it comes to preventing financial disaster.  Another important aspect is to minimize spending in the first place.

I recognize it has almost become part of the American way to borrow in order to have what you want today instead of waiting until you have the money saved up.  A much better plan though is to focus more on financial security and reduce your fixed and variable expenses as much as possible.  As an added bonus, reduced expenses will definitely make an emergency fund last much longer.

Avoiding Pitfalls and Staying Out of Debt

Even if you don’t lose your job, the ease of obtaining credit makes it easy to end up in over your head financially.  There is nobody looking out for you to say ‘hey, wait a minute, you have already spent way too much this month, you have to cut back’.  Therefore, you have to be the angel on your own shoulder watching out for yourself.

One idea is to take a look at your credit card bill or expense receipts each month to see what you spend on the most, and then attack that expense.  For instance, lets say eating out is your biggest expense each month.  Evaluate why you eat out so much.  Is it because you love fast food and you are tempted to pull over and grab a burger when you are out and about?  If that is the case, then make sure you are full when you run errands so you aren’t tempted to eat another meal. Maybe your life is so busy that you feel eating out is your only option.  Then consider either simplifying your life and cutting back on some of your commitments.  Or, pack food ahead of time and keep it in a cooler to be eaten at meal time. In essence, recognize that there are other options besides eating outside of the home.  It might not be as fun, but it is a lot healthier and cheaper.

That is just one example of an expense that can be reduced with some creativity and a little bit of work.  There are a million different expenses that can creep up on you and cause long term pain if you don’t pay your credit card bill every month or spend unwisely. Fact is, if you are not paying your credit card bill off every month, then you should not be using a credit card at all, period.

Debt is not limited only to credit cards though.  As you know, many people get in over their head with their homes too. Some people have gotten in to trouble because they bought another home before selling their current house.  During a seller’s market, people were able to get away with buying a home before selling because there was a very good chance their current home would sell quickly. However, that is definitely not the case right now, and buying a home while holding a current mortgage is a very risky proposition.

In a perfect world, you wouldn’t have too much debt in the first place.  If you remember to spend like you are on a limited budget even in good times, then hopefully you will be better prepared for the bad times, if they ever happen.

What method do you employ to stay out of debt and secure your finances?



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{ 11 comments… read them below or add one }

krantcents July 16, 2011 at 10:58 am

This happened to me in the early eighties! I helped sell the company I was working for. Although I received two months severance, I was looking much earlier. I was very lucky to walk out on Friday and start with the new company on Monday. I pocketed the severance. Normally, this does not happen. A little preparation and savings can help tremendously!


Kris July 16, 2011 at 4:59 pm

Krant- that is fantastic you were able to pocket the severance money and start getting paychecks right away through a new job. I think it is so important to always be on the lookout for new employment opportunities because you just never know anymore.


First Gen American July 16, 2011 at 7:38 pm

I think it’s prudent to cut costs as if you’ll be unemployed for a long time. I just know way to many people who were unemployed for over a year. The ones that suffered most were the ones who kept their spending at the same levels as when they were working.


Kris July 16, 2011 at 10:47 pm

I am actually shocked at the amount of people that are unemployed, but are still spending like they happily have a job. They then want someone to help with their mortgage payments and what not. I just don’t get it.


101 Centavos July 17, 2011 at 12:05 am

Ideally people should have a plan to lose their job, or at least what to do in terms of controlling expenses in the event of job loss. A three-month plan, followed by an even stricter “austerity” plan if another source of income doesn’t materialize. I don’t think I’d be out of work that long, but at the three-month milestone, our lifestyle-reduction plan kicks into high gear.


Kris July 17, 2011 at 11:01 pm

If my husband lost his job, my lifestyle reduction plan would happen that very second. That would be, after I cried my head off, panicked, and got medicated :). We have never counted on my salary for anything, so if my part time job gets axed, oh well. I will just have more time to blog and garden.


Niki July 17, 2011 at 9:26 am

We have created a plan. We haven’t got to the point where we are building our emergency fund, but we do have a contingency. Next month is the last of our credit card debt and I can not wait to save like crazy to prepare for the worst. Since the beginning of this year we have been having job security issues and it still hasn’t panned out yet, but it’s lookin’ better though.


Kris July 17, 2011 at 10:59 pm

Niki, I remember when I paid off my student loans, I was walking on air. Even though we didn’t have much in savings, I was so happy to have that debt paid off. I look forward to reading about that last payment next month!


Little House July 18, 2011 at 9:18 am

I think another good option for people underwater on their homes and struggling to make the payments is rent out a spare room to a person (like a college student) or rent a portion of a room or garage for storage. You might be able to make a few hundred dollars a month to help pay the bills. Great tips, Kris.


Kris July 18, 2011 at 9:26 am

Little House- You are right, making the most of spare space by renting is a great idea- especially if you live near a college. (Although then your home might turn into a frat house 🙂 )

I often forget about the renting option as I have been a homeowner for most of my life and I don’t own any rental properties. But renting is a very viable option.


Ameriloan August 14, 2012 at 9:47 am

Recently I have heard that 28% of Americans do not have any emergency savings, if it’s true then I guess that almost third part of our population isn’t prepared for a job loss. To my personal opinion, only emergency fund can help to get financially prepared for a loosing a job or other unexpected financial problem. Emergency fund is a must have for every one, because it can help to avoid unexpected financial crisis and avoid making debts. Because usually if something happens and a person needs money than the first thoughts are about borrowing money and taking out a loan.


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