Losing a source of income is probably one of the scariest things that can happen to anyone. Unless you have already established several income streams, getting laid off from work, or having to quit your job to recuperate from a severe illness is a huge blow to your financial life.
Aside from massive debts, these are some of the most common reasons why some people undergo financial hardships. A survey by the Federal Reserve Board says that 1 in every 4 households experienced hardship last year, with job loss, health emergency and pay cut or reduced work hours as the primary culprit. Indeed these are scary things that can happen to anyone, but it’s one thing to panic and another thing to know what to do when life throws something at you.
Asked what people would do if faced with a financial crisis, only 53% of respondents said they can come up with $400 from their emergency stash or checking account. The rest would have to sell something, use a credit card, borrow from friends or family, or use a payday lender.
The problem is when you lose your income, you will never know when you are going to get a replacement for it. You have to keep applying for another job, which will be another expense on your part. That’s why experts recommend having 3-6 or even 9 months’ worth of your total monthly expenses stashed in an emergency savings account that is easy to liquidate in case you need it right away.
The first thing you need to do is to take stock of your current situation. Take a look at your checking account, your company’s separation pay, and your current monthly expenses. With the money that you have, how much time do you have before you run out of money? Nonetheless, no matter how long you can get by without a job, you still need to have a sense of emergency in finding a new source of income.
Second thing you need to do is to cut back on luxuries and live on lean. Reduce your monthly expenses by saving on anything you can save so you can stretch every dollar you currently have. Self-pity won’t help you here; you need to objectively look at your situation. Being stingy in this situation is just normal.
Third, you must avoid predatory lenders such as payday loans as much as possible. Payday loans, with their sky-interest rates, are even worse than cash advances that you can make from your credit card. They will only bury you in debt faster than any type of loan could. By the way, avoid doing cash advance, either. Apart from their high interest rate, cash advances have upfront fees which is charged on your just when you dispense money from and ATM. Using payday loans and cash advances is like taking the fast lane to getting buried deep in debt.
Still, the best way to deal with a loss of income is to have a safety net that you can tap anytime. That’s why we always emphasize the importance of having an emergency savings account, to which, if possible, you make automatic monthly transfers from your payroll account.