(Note: This article originally appeared in my column for the Florida Times-Union in 2005. The advice is still timely, although I’ve updated some research data.)
Every day, someone somewhere loses a job. If you were told that you’d be laid off tomorrow, what would happen? You may never be ready emotionally, but you can take steps to be more prepared financially if you experience a layoff or other change that affects income.
According to Dr. Terry Mullins, former professor of management at Jacksonville University, most people don’t spend time thinking about their finances when things are good. Dr. Mullins, who also does financial planning, says that many people will never achieve financial independence, simply because they haven’t made it a firm value to which they’re committed. He defines financial independence as being able to work just as much – or as little – as you want, instead of relying on a full-time salary to afford your lifestyle. Here are his tips for being prepared if your income should change dramatically or even be lost.
First, he suggests living below your means. Yes, not within – below. “Maintaining an extravagant lifestyle means that you’ll always be dependent on your full salary, or on remaining a two-income household,” he says. “That means you’ll be more likely to stay in unsatisfying jobs just for the money.” It’s tempting to spend money on things that put you into debt or require ongoing maintenance costs and start a cycle of higher spending.
For example, homeowners took advantage of record low mortgage rates over the past few years to purchase larger houses instead of paying off more modest homes quickly. The larger houses require more maintenance and higher utility costs on top of a higher monthly payment. Making a conscious decision to pare down your household expenses means that you will have more breathing room if your family’s income is impacted.
Once you have your spending under control, most experts recommend that you accumulate the equivalent of 3 -6 months of typical expenses in savings as a cushion against losing your income. Calculate basic needs, such as rent or mortgage, car payments, utilities and insurance. Having a safety net will help you maintain a more positive attitude toward your job search and allow you to compare opportunities objectively. When you’re desperate to pay the rent, you may accept jobs that are a poor match for you, perhaps starting a downward spiral in earnings and career satisfaction.
Dr. Mullins’ second suggestion is to pay down as much as possible of your personal debt while you are earning a full income. Consumer debt is growing in the United States. According to Experian, the national credit reporting bureau, the average family is carrying $4,501 in credit card debt. (When I wrote the original article in 2005, the amount was $4,663.) In Jacksonville, the average is $5,018, according to Experian’s 2013 credit survey. The average annual interest rate on credit cards runs around 18 percent, typically the highest interest debt any consumer owns. Credit counselors advise you to pay down your highest interest debt first, then work toward paying down long-term debt.
If you are paying $100 per month in credit card debt, that money could be put to much better use. According to an Interest.com (www.interest.com) mortgage calculator, paying an extra $100 per month on a typical 30-year mortgage can pay your loan off as much as six years earlier. Depending on your interest rate (we used 5.75% on a $150,000 home mortgage) you could save yourself some $42,000 in interest over the life of the loan.
Finally, Dr. Mullins suggests that individuals consider developing another source of income on the side. You may have a creative streak and be able to sell art or crafts or even trade items on E-Bay. You may do consulting work, take on a part-time job, or invest in rental property. Whatever your sideline, Dr. Mullins strongly advises against adding this extra income into your family’s regular operating budget. “This income serves two purposes,” he says. “You have a way to accumulate savings or paying off debt, and you have a source of income and work that can help your self esteem during a difficult time.” Some people even find that this sideline becomes their next career, providing them more flexibility and quality of life.
Preparing for the worst when times are good helps you focus more clearly if you should ever be laid off. You can spend your energy on seeking meaningful employment, and will be a much calmer and more attractive candidate as you approach prospective employers. Even if money is tight, Dr. Mullins does approve of spending some money on yourself during your job search. “Invest in keeping up your grooming and wardrobe,” he recommends. “You want to look your best when competing for your next job.”