This post is from GRS staff writer April Dykman.

According to the Bureau of Labor Statistics, the number of unemployed was 15.4 million and the jobless rate was 10 percent in November. While those numbers “edged down” from previous months, there’s no doubt that job loss and unemployment are hot topics, and people are worried.

Some of those lucky enough to hang onto their jobs have experienced salary reductions, reduced hours, or withheld bonuses.

Even if your income has remained unaffected, hearing stories on the news and witnessing friends and family members experience job loss can make a person nervous. It’s why car dealerships and travel companies are offering job loss insurance, reassuring consumers that it’s okay to buy a new car or book a cruise.

But wiggling out of a major purchase means little if you still can’t afford to pay your mortgage after job loss.

Worst-case scenario planning
This made me think about what my financial situation would look like if I lost my job, if my husband lost his, or if somehow we both found ourselves unemployed. What is our worst-case scenario? Could we cover the essential bills? And for how long?

This is the process I used to create a worst-case scenario snapshot of our finances. I’ll use fictional couple Michael and Kay as an example. Their combined monthly income after taxes is $5,000. Michael makes $2,000 per month, and Kay brings in $3,000 per month. They have an emergency savings fund of $10,000.

Step one: Assess current expenses
First, they’ll look at their current monthly budget:

  • Mortgage: $1,100
  • Food & Dining: $500
  • Bills & Utilities: $325
  • Gas & Fuel: $300
  • Vacation Savings: $200
  • Massage Therapy: $150
  • Gym: $100
  • Property Tax: $100
  • Health/Prescriptions: $140
  • Clothing: $100
  • Auto Insurance: $45
  • Home Insurance: $30
  • Donations: $30
  • Netflix: $18
  • Personal Care: $25
  • Misc: $120
  • Retirement Savings: $834
  • Other Savings: $883

Step two: Cut expenses
Next, Michael and Kay examine their fixed and discretionary expenses and determine where they could cut back, if needed. They eliminate savings and clothing from the budget right away. They decide that they could cut back on food by $100 if they quit eating out, and they could live without massage therapy and gym memberships. This lowers their monthly expenses to $2,633.

  • Mortgage: $1,100
  • Food & Dining: $500 $400
  • Bills & Utilities: $325
  • Gas & Fuel: $300
  • Vacation Savings: $200
  • Massage Therapy: $150
  • Gym: $100
  • Property Tax: $100
  • Health/Prescriptions: $140
  • Clothing: $100
  • Auto Insurance: $45
  • Home Insurance: $30
  • Donations: $30
  • Netflix: $18
  • Personal Care: $25
  • Misc: $120
  • Retirement Savings: $834
  • Other Savings: $883

Step three: Evaluate possible scenarios
If Michael lost his job, their monthly income would be $3000. With monthly expenses of $2,633, they’d have $367 left at the end of the month and wouldn’t have to dip into the emergency fund except in case of emergencies.

If Kay lost her job, their monthly income would be $2000. They’d either need to cut back more, or use the emergency fund to make up the $633 difference. If they used the emergency fund, it would last for about 15 months — barring any unforeseen expenses.

If both Michael and Kay lost their jobs and had to live off of the emergency fund, their savings would last for about three months.

Other expenses and income
In a real-life scenario, you’ll also need to account for health insurance. Whether you’d get coverage under your spouse’s plan, an individual policy, or through COBRA, you’ll need to add the premium into your financial game plan.   

Unemployment benefits, if you qualify, are another factor in your worst-case scenario budget. Don’t forget that unemployment benefits are taxable. To avoid a ginormous tax bill on April 15, have federal income taxes withheld or pay quarterly estimated taxes on your unemployment income.

Next steps
Depending on your outcome from this exercise, you might decide it’s not time for a new car or a cruise because you need a bigger emergency fund. Or maybe you can relax because you’re right on track with your savings goals.

Either way, it’s a good idea to know where you stand and what your game plan will be if you were to experience job loss.

Have you created a worst-case scenario budget? Do you feel prepared to weather a job loss (either your own job or your partner’s)?

This article is about Career, Planning