As many longtime GRS readers know, a few years ago I quit my job to become a full-time writer.

The decision to ditch a job and leap into self-employment always brings up a lot of big questions, like where to get health care and how to adjust to working alone.

But the biggest question on my mind was about income. What if I lost a major client and my income suddenly dropped?

While I was still weighing the pros and cons of a secure paycheck, I learned that right before I was hired there was a series of layoffs in another department. It shocked a lot of people who thought the company was a “safe” place to work.

It was then that I really understood that no job is guaranteed, not even my seemingly stable day job where 20-year employment anniversaries were common.

Don’t panic
Whether your income comes from a few sources and fluctuates, or whether it’s steady and dependent on one company, you just never know when it might take a nosedive.

And sometimes it has nothing to do with your employment situation. Medical expenses can come out of nowhere and quickly escalate into the tens of thousands, or more. Several years ago, my friend lost all of his possessions in an apartment fire. We have no idea when disaster will strike.

But that doesn’t mean we should live in a state of panic. In fact, the worst thing anyone can do during periods of trouble is panic because it leads to poor decisions.

“I’ve known people who are so worried about not having money that they started selling assets before they really needed to,” says Bob Stammers, director of investor education at the CFA (Chartered Financial Analyst) Institute. “For instance, they take money out of their 401(k) prematurely, which really makes no sense. That’s the thing that you do when all else fails, and if you don’t do it, you don’t pay your mortgage and your house goes into foreclosure.”

And while taking money out of a 401(k) is bad, there are even worse options for the financially desperate, like taking out a payday loan at an insane interest rate or using credit cards like an emergency fund, digging the hole deeper and deeper.

Be the ant, not the grasshopper
So how do you stay calm when you’re worried about keeping the lights on? The key is to prepare before disaster strikes.

“I personally think the more disciplined that you can be about fiscal planning and budgeting, the better,” says Stammers. “Of course right now there are a lot of people who are worried about their employment situation. With the government saying that they may have to cut back on funding, a lot of government workers are probably thinking right now about their jobs. But I think everyone should have a plan. A lot of people have unexpected situations that affect their income, so it makes sense to know what to do if things go bad.”

So where do you start? Stammers says these five elements are key to weathering a financial storm:

  1. Have an emergency fund in place. “I think three to six months of living expenses, with six being ideal,” he says. “It really depends on how much income you have to replace because the larger your income is generally the longer it takes you to find another position.” And if you have consumer debt, start with a small emergency fund of $500-$1000, pay off your debt, then finishing building your emergency fund.
  2. Always be negotiating. You already know that when your car insurance is up for renewal, you should shop around and negotiate to get the best deal. And if disaster strikes, it’s even more critical to talk to your service providers. “A lot of people [are] unwilling to do this because it’s kind of embarrassing, it’s not fun,” says Stammers. “But it’s much better to go to your credit card company and be honest that you’re having trouble paying them, because once it’s sent to collections there’s nothing you can do. You’ve ruined your credit, and you still have to pay the bill.” Also, keep in mind that service providers want to hear from you. “Service providers want to keep their clients, especially when the client is only in a temporary situation,” says Stammers. “Very often you can negotiate either a reduction in service or reduction in cost.” For instance, you can reduce your limits on your insurance policies. “It’s not a great place to be, but hopefully we’re talking about a temporary situation,” says Stammers. “You have to weigh the insurance limits and costs against the fact that you don’t have income.” Another tip is to get your student loan payments deferred. “A lot of people don’t know you can do that,” he says. “As long as you’re unemployed, you can defer it.”
  3. Tap your network. Stammers says that networking is something that everyone should be doing all the time. “The people who are networking all the time are the ones that tend to spend the least amount of time unemployed,” says Stammers. “That’s because the majority of jobs are found by networking, and a lot of jobs are filled before the opening is even announced.” In addition, if you lose your job, “you know who to call, you know where there might be opportunities and you won’t sound so desperate,” he says. If you aren’t networking now, Stammers recommends starting with your alma mater. “Find out if there’s a college networking event in your area,” he says. “I meet all sorts of people at those events, and it’s great because I already have something in common with them.” He also recommends checking out industry events and seminars.
  4. Develop an income-producing side hobby. “I know people who turn down work all the time because they’re busy and because they’re comfortable,” says Stammers. “But this is one of the best ways to reduce the risk of losing income, because if you’re maintaining an extracurricular business, it’s easier to turn that up than to start it. It’s also going to take you time to build a client base.”
  5. Create a basic austerity plan. List your regular expenses in order of what you can cut first. For instance, luxuries like eating out and going to the movies are one of the easiest things to cut quickly. But as you cut more and more, the decisions can get tough, which is why a plan is so important. “When you have to make harder and harder decisions, you’ll know what they are ahead of time,” says Stammers. “So if you’re unemployed and your wife is working, maybe you don’t need two cars, so you get rid of a car. You already know what to cut, so you aren’t making crazy decisions.”


Hopefully, you won’t ever need your emergency plan, but you might just sleep better at night knowing it’s there. “The idea is to reduce your risk as much as possible,” says Stammers, “and the way you do that is by planning ahead.”