What To Do If Your Income Is Reduced
It’s challenging enough to make a paycheck last when it comes on a regular basis – but what happens when you have to take mandatory time-off or a reduction in hours, or are paid for some months out of the year but not others? With planning and a careful look at your finances, you can survive the times when the checks are on hold but the expenses march on.
What to do today
Not having enough money to pay for life’s necessities can be pretty scary, but there are a few things you can do to get you through this time with minimal hardship.
Your first task is to take a 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. 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, they can be resumed.
When shopping, consider every purchase. Ask yourself if you really need it, and if you do, can it wait a while, or can 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 is not promised to high interest debt.
If you have credit card payments, and you simply don’t have the money, 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.
If you really need to scare up some funds, consider every option:
- Sell assets, from a garage sale to unloading securities (just beware capital gains taxes for next year).
- Obtain temporary employment elsewhere.
- If you have children who work, ask them to contribute to the household budget.
- Make and sell things if you have a creative streak.
- 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 a relationship.
- 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.
There are other sources of funds available, but beware: they may not be in your best interest in the long run.
- Payday loans – Borrowing against future income can seem like a great short-term solution, but with average annual interest rates ranging from 390% to 871%, payday loans are no bargain.
- Credit card cash advances – There is often an origination fee to take out cash from a credit card, and interest not only begins to accumulate immediately, but is often higher than for purchases.
- Home equity loans or lines of credit – The equity in your home might be money that is readily available for you to borrow, however, if you can’t repay the loan, you put your home in danger of foreclosure.
- 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 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.
Planning for Next Time
So 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.
The money you get today will have to be stretched to cover those times when there will be nothing (or less than normal) coming in. Resist the urge to spend it all each month. Develop a detailed budget to know what your monthly expenses are, and then prorate your income:
Example: Your monthly expenses total $2,000. You don’t get paid for two months out of the year, so will have to have $4,000 ($2,000 x 2 = $4,000) set aside for those non-income earning months. For each of the ten months that you do receive a paycheck, 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 sock away, have the sum deducted monthly from your checking account and automatically deposited into a savings account.
Since you know 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 account.)
Careful planning is the key to surviving a time when a paycheck is less than normal or intermittent. By doing so, you’ll avoid that dreadful feeling when the lean times are on your doorstep – and your account is bare.