Monday, October 6, 2008

How to Prepare for a Loss of Income

Unless you've slept like Rip Van Winkle through the last few months, you know the economy is on very shaky ground.  

Job losses are climbing.  Retirees and soon-to-be-retirees are nervous and watching precipitous losses in their assets.  Small businesses are hurting.  It's not pretty out there, and it may well get worse before it gets better.

Losing your income is terrifying, even if it only happens for a short time.  But there are things you can do to offset the loss, if you start planning before the income stream cuts out. 

Sometime in March, unless it's a bit earlier than expected, I'll leave the workforce for 3 months to take care of our newborn.  As a consultant, this time will be entirely unpaid for me.  As part of a dual-income couple, and as someone who has worked since age 15, this is a little scary to me, even though we've saved and planned for the eventuality.   While I'm fairly certain I have a job to return to, with recent market swings, and the likelihood of a prolonged recession, I'll admit that I'm nervous.

So I'm taking some steps to prepare.   A maternity leave isn't a vacation.  It's staying home to take care of a helpless child, until such time as I'm healed enough and the baby is not quite so newborn and able to be cared for during the day by others, in my case, by family.  

Sander and I have been planning and saving for this maternity leave for a long time.  But that doesn't make walking away from a weekly paycheck less nerve wracking.  Still, we're mitigating the concerns we can control, such as:

Saving up
We'll have 3 months of living expenses, in addition to our existing emergency fund to live on during the time I'm out of work.  We've worked pretty hard to try and calculate what the time will cost us, and save accordingly.

Cutting back
We're not buying anything that doesn't need buying if we can prevent it while I'm out, but also now, as much as we can.  Over the last 4 months, some of our budgeting efforts got derailed by unplanned side effects of my pregnancy, a recent forced pay cut, and a large appliance dying on us.  While we're working hard to regroup from those things, the fact that we're cutting back as much as we're willing to is helping as well.  New things, unnecessary home projects, and other spending can wait.  Ensuring our savings will cover the lack of income is far more important.

Stocking up
Just as we're stocking up our cash reserves, we're also stocking up the pantry and freezer.  A 14.8 cubic foot freezer joined our household this summer, and it's meant to be a workhorse. Soon to be filled with local chicken, piles of pre-prepared meals, and other items for us, it's part of our overall plan to be as well stocked as we can, to reduce our outlay for groceries when the littlest MoneyPenny joins our clan.  

The freezer is not the only tool in our toolkit either.  I shop sales, and I track prices.  When I find a good deal, I'm not averse to buying very large quantities.  Over the next few months, I'll be spending a lot of time doing just that - to heavily stock our already full larder.   My goal is always to be able to eat for a few months from my pantry.  I intend to double that resource between now and then by shopping smart.  Yes, I've allocated some extra money in the budget now, while the income is flowing, but I'm also working hard to buy cheaply and in quantity. 

Putting our bills on autopilot
After we moved, I got a little distracted, and never signed up for auto pay for some of the new bills.  As a result, I've had to keep track of them - something I do relatively well.  But even now, occasionally I lose track of something.  Sleep deprivation from a newborn is not likely to improve that, so direct debiting our recurring bills is key.  

Paying ahead on a few bills
Now, this is something that I don't recommend if a) you don't have a fully funded emergency fund of at least three months of living expenses, and b) if you are one of those people who wants every cent of interest possible on every dime you have.  But if you are going to be out of work, a few months without a heat or electric bill might just give you breathing room, if only just psychologically.   Sure, you are giving up the money now, but now it's replaceable with a paycheck.  Later it won't be.  

Making new habits
The no-knead sourdough bread I've been making over the last few months has significantly reduced our outlay for store-bought bread.  We still do buy some, but not nearly as much.  And given rising prices, that's a very good thing.  Even with the cost of flour, it's much cheaper to make bread than to buy it, and I can bake a loaf or two a week of bakery-quality bread.

That's just one of the habits I've been working on now, so that when I am a tired and overwhelmed new mom, I won't need to think about it - I can just do it.

And it's not just bread - I've slowly been adding new, frugal habits, such as ironing vs. dry cleaning a larger portion of my clothes.  I hardly think I'll need to iron while out on leave, but I'll have a lot of nicely pressed clothes to return to work in.

Taking stock
Sander and I have had a lot of conversations lately about whether we really need certain things over the last few months.  I expect more will come.  We're thinking about what we're willing to cut now, rather than later.  Under the gun, cuts can feel more painful than if they are well thought through choices.  

We've tried to balance our cuts with some fun for spending that we know we won't be doing once the baby arrives, such as a spontaneous weekend getaway, or dinners out.  But within reason, and within budget is the key.

I've said it before and I'll say it again - living within your means takes planning and forethought.  If your means are about to get reduced, take some time to think about what you might do to increase your savings, reduce your bills, and cover the lean times now.  You will thank yourself later.


Our Common Cents said...

Wonderful ideas, thank you. Sometimes we get too caught up in frugality of the little things to really think about the bigger things (such as complete loss of income for any period of time).

I have a question about automatic bill pay - I've always wondered about managing automatic bill pay for bills that are variable. How do you make it work? Perhaps you could explain in a latter post.

Urban Cowgirl said...

can you please share your no-knead sourdough bread recipe with us? I'm trying to get in the habit of making bread at home to avoid buying it from the store. Thank you.

Urban Cowgirl said...
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