Lay-Off Resistant Family Finances
This guest post from Sam is part of the “reader stories” feature at Get Rich Slowly. Some stories contain general advice; others are examples of how a GRS reader achieved financial success — or failure. These stories feature folks from all levels of financial maturity and with all sorts of incomes. Sam writes about personal finance at Grad Money Matters.
A few years ago, my husband and I began planning to have children. As part of this, we tried to prepare to switch to a single income mode, in case it became necessary. Being a single-income family is hard, but as many people can attest, it's perfectly do-able. If you're spoilt by a dual-income lifestyle however, switching back to the single-income mode may seem next to impossible. Unfortunately, that's where we were. So we drafted a rough plan and started putting it into action.
Several years have passed since then, and we haven't quite made the switch yet. But something great came out of this exercise. Now, even if both of us were to lose our jobs at the same time, we think we could survive for several months, maybe even a year, without too much hardship. This has been a great source of relief during these turbulent times.
Here's what we've done.
We drafted a budget
When I was a student and my husband was the sole bread winner in the house, life was relatively simple. I made sure that I earned enough through scholarships, or part time jobs, to cover my tuition, board and fees, while my husband focused on paying off our debt and saving up for the future. Since what I made just covered my expenses, we pretty much had a single real stream of income which got mapped to all outgoing expenses, and we knew exactly where we were spending all our money.
Things changed dramatically when I graduated and started working. We lost track of who paid for what and did not have much clarity on how our money was being spent, or how much for that matter! This uncertainty was caused us a lot of anxiety anytime we thought of switching to single income. One day we sat down to analyze our household expenses and were pretty stunned at all the “excess”.
We categorized our expenses, and made one person responsible for each category. In general, this helped us get a better perspective and accountability of where we spent our money each month and how we would be affected if we were to lose a job.
We reduced expenses
Making one person responsible for each category really helped us see how much more we were spending compared to our old single-income days.
For instance, once all the restaurant expenses started coming from one person's budget, it was clear that this was one of the categories that we had to start trimming a lot. The same was true in case of the groceries, entertainment, travel, etc. (but to a smaller extent). Slowly we brought expenses down, until the total of all the categories fit within one person's income (we picked mine, since it was the lesser of the two).
It doesn't matter who actually pays the bills. If the total money spent each month is less than the lowest income, the transition to a single income is a lot easier.
We increased emergency savings
Once most expenses would fit within a single income, we had roughly the equivalent of an additional income leftover each month.
After maxing out our retirement accounts, we used the rest to bump up our emergency account and to make additional payments for the mortgage. When trying to determine a target amount for our emergency fund, we split it in two:
- The first part was the “true” emergency fund, which has a certain amount to cover, well, true emergencies.
- The second part (we called it “freedom” fund, kooky as it sounds) was for covering the shortfall for the first few months as we adjusted to living on one income.
Knowing that we had some wiggle room in our emergency fund for the transition period, without compromising the ability to be prepared for true emergencies, reduced the anxiety about the switch.
We decided to get out of debt
The most helpful part of this process was that we had already paid off all our consumer debt, and we vowed not to take out any more loans. We still had a mortgage, though. And when the baby came, we faced a big decision: Should we replace my older, smaller car (Jetta) with a bigger, newer one (SUV)? It sure would have been more convenient, and I was more than a little tempted.
But having a car payment of, say, $300 per month would mean $300 less money that we could apply towards the emergency fund/mortgage. And if/when a layoff happened, we'd not only have a smaller emergency fund, but also an additional $300 to worry about each month. So we decided to make do with our current car. Apart from occasional grouching, we've done just fine.
Also early on, we decided to start putting a little extra towards the mortgage whenever possible. Initially, the mortgage was so large that it looked like there wasn't any point to paying extra towards it. Even though we bought a house well below our means, trying to pay off a mortgage is no joke. After our emergency savings reached a decent level though, we started putting more and more towards mortgage.
I'm very proud that, as I write this, our mortgage is completely paid off. I really have no idea how we managed to do it, but at one point, it just snowballed. This has been such a huge anxiety reliever. Now even if both of us were to lose our jobs, we should be able to survive for several months, maybe even a year, picking up odd jobs if necessary, without having to worry about the roof over our heads. I know a lot of people think prepaying a mortgage isn't wise, but to us this kind of freedom is priceless!
We looked for extra income
After spending the day at a stressful job and the evenings taking care of the house and family, all I wanted to do in the nights/weekends was relax. Luckily for me, my idea of relaxing is plonking on a comfortable sofa with my laptop. Gradually, I started reading a lot of financial blogs. Some of them (like Get Rich Slowly) talked about how to make more money. This got me thinking that if we had some additional source of income, the loss of a day job might not quite seem so bad. So, I started looking into blogging myself.
Its been an on-again, off-again venture over the past four years depending on how busy life gets. And my blog hasn't generated a whole lot of income, but every single dollar that came out of it gave me that much more to add to our emergency savings and mortgage payoff. Now, with both of these goals met, I've been pouring the income from the blog back into it, which has helped me put together a spectacular section about money making ideas so I can share what I've learned with other people.
If I were to lose my job tomorrow, I probably wouldn't even look for another one. I know I could beef up my efforts on my blog to earn more income while having a lot more flexibility with my time and a lot less stress compared to a corporate job. I may not be able to replace my current income, but I should be able to earn enough to stay independent while my husband's income takes care of other family expenses. Without debt and a simpler lifestyle, we should still be able to save some for vacations and for the future.
We created some frugal rules
We both come from lower-middle-class families. We saved on our own to bring ourselves to the United States for our master's degrees. We made a lot of financial mistakes during our first years here in the U.S., and spent the next few years trying to fix them. But these early mistakes helped us put in place a few “rules”. Not anything stringent that would backfire on us, but some simple ground rules to keep us in check.
- “If it's not on the grocery list and not really needed right now, it waits till the next trip.” This rule helped cut down a lot on the unnecessary impulse buys.
- “Eat lunch out no more than twice a week” helped cut down our eat-out budget drastically.
- “Never buy anything that costs over $100 without comparison shopping first” helped us not only get good deals on what we wanted, but made us stop for a while and think if we really wanted it in the first place.
These are good frugal concepts to live by any time, but with the uncertain economic climate we currently have, these rules can mean the difference between smooth transition or total turmoil when dealing with voluntary or involuntary job loss.
Ready for anything
These simple things that we started doing a few years back have helped us a lot today to be prepared for possible layoffs. When we started, these habits were meant to help switch to a single-income mode. In hindsight though, these were some of the best “plan ahead” things we've done. With my job hanging on by a thread and my husband changing his job three times in the past year, these have been a big source of financial peace of mind for us.