April 17, 2009

Backup Financial plan in Case of a Job Loss

Right now I have a pretty good paying job but my employer has had several rounds of layoffs over the past 10 years. Thinks are looking OK right now but I don't know if we'll get through the current recession without some job cuts. I'm fairly confident I will not be laid off any time soon, but you never know. Its best to plan for the worst and hope for the best.

For the past half your our spending has been about $4,250 a month. That is a lot of money for sure. But our monthly take home income is over $6,600. So while we spend a good amount, our income is pretty high so overall we're saving a lot as well. But if I lost my job we'd lose most of our income and our spending would have to change.


Step #1. - Cut back our spending so our short term income will cover it.

One mistake I have seen from some people in todays economy is that they do not immediately and drastically cut their spending when they first lose their job. If I lost my job then we'd make immediate cuts to our discretionary / 'wants' spending.

We would cut our spending to something under $2800 a month. With severance, unemployment, our rental income and my wife's home business we should be able to cover that level of monthly expenses for maybe a year or so.

These are the areas that we'd cut back:

Eating out. Cut back about 90%. We'd probably still treat ourselves to an occasional, maybe monthly dinner out.
Travel. We'd cut any unnecessary travel. Most of our travel spending is on vacations and that could be cut significantly. Vacations are a luxury you can't afford if money is tight.
Entertainment - Cut back about 90-100%. We don't spend a huge amount of entertainment but we'd stop almost all of it.
Clothing - We can make due with the clothing we have. Cut 100%.
Cable TV / Netflix - Drop HBO immediately. We'd probably keep Netflix and cable at least in the short term. Cable is our primary form of entertainment and reasonably good value.
Gifts - Gift giving would have to take a back seat temporarily. Cut 100%.
Discretionary spending money - This category is misc. spending on stuff like an occasional latte or personal purchases of movies, games, books or whatever other miscellaneous spending. I'd cut this back 90-100%

Total cuts = over $1450 / month

Secondly I'd look for other areas to save money. I could probably cut some off the following expense categories:

Home Maintenance & Auto maintenance - These are two areas that I could cut costs significantly by either delaying repairs or doing the work myself.
Grocery / Drug store / home goods.I'm sure this category could be cut back a ways. we've been spending quite a bit on household goods and we could cut back further on our grocery bill with a bit of effort. ON the other hand our grocery costs would go up a little bit since we'd be eating out a lot less.
Gasoline - I'm not sure if we'd be able to cut gasoline spending. I'd not have to drive to work so that would cut it some but I might be doing other travel while job hunting.

Savings = unsure

Our mortgage, Garbage & water bills are fixed and not something we can cut back on.

Step #2 - Get health insurance, look for life insurance.

I would not want to go without health insurance. We'd probably take COBRA coverage short term and look for a high deductible plan with health savings account (HSA) after that. We have funds in our HSA that would cover COBRA for a while. Longer term we'd want to get our own plan since it would be a cheaper option. I'd also want to look for life insurance since my current coverage is through my employer.

Step #3 - Look for other cuts & find alternate income.

Longer term if I was unemployed for a while than we'd have to look at making deeper cuts.

- We're fairly frugal with our electricity use. I don't see any easy or cheap ways to cut back. We could cut the heat down and save that way but this is not a first step for us.
Insurance - We might be able to shop around and get a better rate. But we're very happy with our current provider. Cutting insurance cost would not be a first step.
Cell phones - We could probably cut our cell phones down a lot if not get rid of them entirely. That would be something we'd have to think about.
Phone and Internet - We could cut our phone and internet. Lower internet would mean a slower service. Not something we'd like at all given my wife has a home business and uses the net a lot.

I could probably cut $100-200 off our bills with a bit of effort

That would bring our spending down to $2600 to $2700 level.

I'd also look for other income sources. I'd probably try working on the side doing computer service work. Or I might spend effort helping my wife with her home business. We'd do whatever would net us the most income. Hopefully that would be enough to add some to our monthly income.


Step #4 - Sell real estate

If I'm unemployed for longer than a year we'd start dipping into savings. Thankfully we have a very healthy cash reserve and our savings would last us a while. But at this point I think it would be smart for us to consider selling either our home or a rental.

We have a rental with enough equity to pay off our home mortgage. If we sold that rental then we'd be able to pay off our mortgage and knock over $1000 off our monthly expenses.

This would bring our monthly expenses down to less than $1700.


Step #5 - Career change and/or move

If things didn't look up for a couple years then we'd most likely consider a major change in our life. I might make a total career change. That could include going back to school for training in a different field. We might also consider moving somewhere with lower cost of living.

While I hope I am not laid off any time soon, I think it is important to have a plan just in case.

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