What to Do If You Experience a Drop in Income

It’s challenging enough to make a paycheck last when it comes on a regular basis – but what happens when you must take time off or a reduction in hours, or if you get paid for some months of the year but not others? You can survive the times when the checks are on hold but the expenses march on – read on to learn how.

What to do today

Not having enough money to pay for life’s necessities can be scary, but there are a few things you can do to get you through this time with minimal hardship.

Look at your monthly expenses
Your first task is to look at your monthly expenses and prioritize them. Decide what you need to pay for and what you can — at least for now — let go of. Housing, food, transportation, and insurance should take top priority. Dining out, clothes, and entertainment may need to be sacrificed for the time being. Remember, this isn’t forever. When the cash is flowing again, these expenses can be resumed.

Consider every purchase
When shopping, consider every purchase. Ask yourself if you really need it. If the answer is yes – do you need it now or can it wait a while? Or, could you get it for less somewhere else? Getting in the habit of asking yourself these questions will help you become a savvy shopper in both good and bad times. This will also help you avoid relying on credit cards during this difficult period. It might be hard, but you will be so much happier when that next paycheck comes in – and it belongs to you instead of to paying off high-interest debt.

Deal with credit card debt appropriately
If you have credit card payments, and you simply don’t have the money to pay them, contact your creditors immediately. You may be eligible for special programs that will keep your accounts in good standing. Waiting until you are behind will not only increase your balance because of hiked up interest rates and fees, but will damage your credit as well.

Get creative – and understand potential consequences
If you really need to scare up some funds, consider every option.

• Make and sell things if you have a creative streak.
• Borrow from your retirement account or cash-value life insurance plan. Be aware, though, that you are borrowing from an asset accumulated for a specific purpose. These come with their own set of problems if you can’t pay them back.
• Have a garage sale to sell stuff you don’t really need.
• Ask a friend or family member for a loan. Chances are they won’t charge any or much interest but be careful – these sorts of arrangements have damaged many relationships. Obtain temporary employment.
• If you have children who work, ask them to contribute to the household budget.

Beware of risky sources of cash

There are other sources of funds available, but beware of predatory loans: many are not in your best interest because they cost too much and/or pose a great risk to your finances.

• Car note loans – these loans work by a borrower exchanging the title and set of keys for a loan based on the vehicle’s value. Interest rates can range from 30 to 120 percent, and if a single payment is missed, the car can be repossessed.
• High interest unsecured loans – usually lent in increments of $5,000 or $10,000, interest rates for this new breed of high-risk, unsecured loans can be as much as 47 percent.
• Payday loans – borrowing against future income can seem like a great short-term solution, but with average annual interest rates ranging from 390% percent to 871%, payday loans are no bargain.

Planning for next time

What do you do to prevent a scramble for cash next time around? First, mark on your calendar the date that you will have to live on less, so it doesn’t come as a surprise.

Next, develop a detailed budget  to know what your monthly expenses are, and then prorate your income. For example, your monthly expenses total $2,000. You don’t get paid for two months out of the year, so you need to have to have $4,000 (which is $2,000 times 2) set aside for those non-income earning months. For each of the ten months that you do receive a paycheck, this means you’ll have to set aside $400 ($4,000/10 = $400) to cover the time you won’t get paid.

Once you know how much you will need to save up, have the sum deducted monthly from your checking account and automatically deposited into a savings account. Our money market account is an excellent way to save up this kind of fund.

Finally, since you will be needing at least some of the money in a relatively short time frame, make sure you have the portion you need in an account that is easily accessible and penalty- free (such as a savings account or money market select account). Don’t put this money into stocks or a long-term share certificate.

Source: Broadridge Financial Solutions, accessed August 2, 2019.