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In case of layoff: A financial fire drill (MSN article)

2K views 4 replies 4 participants last post by  debmar 
#1 ·
Just finished reading this article:

In case of layoff: A financial fire drill

It has a lot ideas about things we here at FV do daily, but its never a bad idea to re-read something in case you missed it or overlooked it when scaling your monthly expenses down (its not indepth mind you, but does get you thinking):

Do you know what your no-frills monthly expenses are? And how long you could stay afloat if you or your mate lost a job? Here's how to get a game plan.

After watching several friends and relatives get laid off, Sonya Ann checked the maximum unemployment benefits in her Midwestern state: a little more than $500 a week.

Her family's current expenses: $2,728 a month.

Time for an extreme budget makeover -- before it might be necessary.

"I know that if (unemployment) did happen, I wouldn't be thinking clearly. So I want to have a fallback plan," says the reader, who asked her last name not be used.

Who among us couldn't use this kind of financial fire drill?

Now is the time to take a clear-eyed look at how you'd pay your bills if the first thing your boss says tomorrow is, "Clean out your desk."

The average unemployment check is $293 per week. Meeting your financial obligations probably won't be easy even if you have an employed spouse or partner. (For a state-by-state list of benefits, click here.)

Being jobless is scary stuff, and some folks just can't deal. "Many people in financial crisis simply stick their heads in the sand, refusing to admit the severity of the problem and ultimately making matters worse," notes MSN Money columnist Liz Pulliam Weston in an article called "How to not pay your bills."

The idea of a financial fire drill isn't to not pay your bills -- it's to cut back on the number of bills you have to pay and to reapportion available funds. Here's how.

An economic epiphany
How much do you need to live on each month? If you can't answer that question, start tracking your spending. What you find may surprise you.

It downright horrified Alma, a 36-year-old mother of two who lives near Philadelphia. Her married life began on a shoestring, but as they earned more money, she and her husband began to spend freely. Lately, she'd become uneasy about "the gluttony of our life," and when she saw the "Your unemployment budget" thread on the Smart Spending message board, "it was like an epiphany."

Her husband is a project manager for a large manufacturing company, and Alma works part time in a supermarket. Their basic monthly expenses are $4,477. If her husband were laid off, he could expect no more than $2,236 a month in unemployment. Their $15,000 savings account wouldn't last long at their current rate of spending.

Hence Alma's epiphany. "I've been blind," she says. "What have we done the last few years? Accumulated a lot of (stuff) and a lot of debt."

She's paring the cable and cell phone plans, will talk to their insurance agent about raising deductibles and vows to become "the gas and electric police" to trim the utilities from their current $3,300-a-year usage.

Sonya Ann's family earns a lot less because health problems keep her from working outside the home. Her husband's salary covers the bills but "without much wiggle room." Expenses related to a recent death in the family wiped out their modest emergency fund.

On paper, she shrunk their monthly budget from $2,728 to $2,107 -- under what her husband would get on unemployment. Among other things, she would stop extra payments against the mortgage, raise her insurance deductibles and drop the land line, because they can piggyback on a relative's cell phone plan.

"My goal is, 'Let's not lose ground,'" she says. "If (unemployment) hit us, I could pull out the plan and use it."

The 'baseline budget'
Both Alma and Sonya Ann created what CPA Sally Herigstad calls "a baseline budget -- the no-frills, stay-alive budget."

"There's something very freeing about finding out what that number is. You have a lot more options when you're not a slave to high living expenses," says Herigstad, the author of "Help! I Can't Pay My Bills" and a contributor to MSN Money. She speaks from experience: 10 years ago she was laid off without warning shortly after switching careers from accountant to tax-software designer.

A baseline budget looks something like this: shelter, basic food, basic utilities, transportation and basic debt service. "Basic" means just what you think it does: Ixnay on the three-night-a-week takeout food. Reduce cable and cell plans or eliminate them outright. Stop extra payments on the mortgage, student loans or credit card debt.

Are your kids involved in a ton of sports, lessons or other activities? You'd need to cut back on those, too. "Think hard about things that require fees and uniforms," Herigstad says. "Could you pass on the equestrian lessons for a year?"

This won't be an easy sell. Your spouse might long for the days of football season tickets or weekly manicures. Your teens may howl that all their friends have unlimited texting and stretch Hummer limos for the prom. They'll get over it. They have no choice.

Of course, there's also the chance that your partner and family will get on board. Sonya Ann's daughter, a high school junior, told her parents that lots of her friends are starting out at community college and that she's fine with going there, too.

Be honest with your kids about what's going on, but don't dump your anxieties on them. Short form: We're going through challenging times, but the family will get through this.

Your kids may react to unvoiced fears, however. S.K., who has three children still at home, was unemployed for 10 months; during six of those months her husband was also out of work. In June 2008 she was hired by an East Coast newspaper, and her husband recently got a job in the transportation industry. They're struggling to catch up on unpaid bills.

Out of the blue last week her youngest child asked, "If we lost our house, where would we go?"

"We went through hell last year. They are stressed over it," says S.K., who's 48.

And it ain't over yet: She's already survived one round of layoffs at the newspaper, but more jobs will be cut in April. "You're thinking: 'I'm next. What am I going to do?'"

For starters, a financial fire drill. Like Alma, S.K. and her husband never really questioned the bills that came their way. "We've never committed to (frugality). We always had jobs with good pay," she says. Lately she's taken a closer look at expenses and found ways to cut back on cable, phone and utility bills.

She's eager to build an emergency fund, because the long spell of unemployment used up every cent they'd saved. Having a savings account once more will make S.K. feel "a little safer."

Cleaning financial house
Suppose you're confident that you won't lose your job. How nice for you. Now get real. In this economy, relatively few positions are ironclad. Let your financial fire drill begin with the following chores:

  • Pay down consumer debt. Better still, pay it off and cut back on nonessential spending. "You should not, in good times or bad, have credit card debt," Herigstad says.
  • Have student loans? Investigate forbearance and other possibilities before you need them.
  • Talk to your insurance agent. Find out how much you'd save by raising deductibles. Do not cancel insurance or let it lapse, even if you plan to garage your car; it can be difficult and/or more expensive to get new coverage.
  • Contact your utility companies. There may be reduced rates for people in financial straits.
  • Work on your résumé. Be ready to market yourself.
  • Belong to a health club? See if they'd let you cancel temporarily. Some clubs will work with you during a downturn rather than have you drop the membership altogether.
  • Make lifestyle changes. Read library books about frugality and cruise the Internet sites for tips on economizing. (Allow me to suggest the MSN Money message boards.)
  • What's it worth? Make a list of what you could sell if push came to shove -- everything from electronics to that fancy mountain bike.
  • The home as collateral. Although the home equity line of credit is not as easy to get as it once was, it's still a possibility, Herigstad says. If you get one, don't you dare use it -- the HELOC is an absolute last resort.
When layoffs are inevitable
For those working in industries hard-hit by the economic downturn, a financial fire drill is even more important. Start working your way through this list:

  • Help for the jobless. Go to GovBenefits.gov to learn about unemployment pay and about other benefits you might be eligible to receive.
  • Change your withholding. If you're certain you're getting laid off, make those last few paychecks a little heftier by adding more withholding allowances. "And tuck that money away when you get it," emphasizes Herigstad.
  • Beef up your emergency fund. Kevin C. and his wife have stashed six months' worth of living expenses. "I'd like to have at least a year," says Kevin, a program coordinator for a Washington state community college. An impending refinance will save them at least $200 a month; it's going straight to the emergency fund, he says.
  • Consider a roommate. Maybe a co-worker, maybe a relative, maybe a student.
  • Investigate health insurance. Being added to a spouse's plan might be cheaper than COBRA (though the stimulus bill has a provision that covers 65% of the cost, which might change the picture).
  • Help with tuition. Kids in private school or college? Talk to the financial aid office about what a change in circumstances would mean.
  • Consider worker retraining. A community college in my region has been advertising heavily to the unemployed: "Free tuition! Free books!" Some of the things they teach, such as phlebotomy and heating and air conditioning, might even lead to jobs. Drop in and chat with an admissions officer, but be wary of too many student loans. (Not everything is necessarily free.)
  • Have a post-benefits plan. Your unemployment may end before you find a job in your field, so be prepared to tackle a new line of work. Kevin C. knows a pharmacist who's working at a hot dog stand. Herigstad tells of a former executive at a major outdoor-gear company now checking receipts at Costco. "She's doing it cheerfully. She's doing what needs to be done. And she will find a job in her chosen field someday," Herigstad says. "People need to remember that they will find a solution. There is always a solution. We have been through recessions before."

The financial fire drill is not paranoid. It's prudent. Suppose you cut $300 a month from your budget. Now suppose you were unemployed for six months. That $1,800 would come in awfully handy along about month five of joblessness.

Best-case scenario: You'll never need to do any of these things.

And if the worst happens? It will be mitigated by your preparations. Not necessarily easier, just simpler.

Save money today
  • Another way to brown-bag it: Tired of bringing your lunch to work every day? A Smart Spending message board reader posting as "toucan77" came up with a surprisingly simple tactic to relieve lunchtime doldrums. Read the tip.
  • Savings made simple: You know you should be building an emergency fund, but you never seem to have the extra funds to do so. Another Smart Spending reader suggests a practically painless tactic. Learn more.
  • Don't throw it out! Some apples in my fridge were getting mushy, but I hated the idea of wasting half a dozen pieces of fruit. The solution was simple. Read about it, and learn how readers salvage past-its-prime produce, by clicking here.
  • Free movie Mondays: One of our favorite bloggers clued us into a promotion for free movie rentals. In fact, he's found a way to get several free movies at one time. Is he frugal or cheap? You be the judge.



Published March 4, 2009
PS - if this should be moved to another spot, please do so! I wasnt exactly sure where to put it! :dunce:
 
#2 ·
Hmmm... I've been playing with our numbers, but I'm going to do a a barebones budget to see what we could get by on.
 
#3 ·
I was thinking of doing one as well....we're pretty much down to our 'comortable barebones' at the moment but there are a few things that we'd slash right off the bat (cable [sorry babe], moto ins. for my bike, etc.) if things get really bad.

I honestly never thought, in my wildest dreams, that at my age (27), I'd see a recession and a looming depression and have to learn to secure my families future by downgrading as much as possible.

Its amazing what life throws your way.....
 
#5 ·
I'm living this - got laid off last summer and took a job in November making a $1000 less a month. When you are doing your 'fire drill' or putting together a 'plan b' take into consideration the impact on others because not only are you changing your spending habits so is everyone who depends on you.
 
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