What do you do if your Income Goes Down?

It is nearly always difficult to adjust to an income decrease. Often, people end up deeply in debt because they were not able to adjust. So what are some things you can do to make the adjustment easier? Here are a few ideas that might help.

Consider decreasing the amount of taxes withheld.

Depending on the amount of the income decrease, your might be in a lower tax bracket and therefore owe less at the end of the year. A recent income decrease allowed us to pay $75 less per month on our taxes. Be careful though, you don’t want to end up owing a large sum at the end of the year! Consult with someone who is familiar with taxes before making your final choice.

Double check your insurance

Now is a great time to see if you are paying too much for car or other insurance. Review your policies and shop around to see if you can get a better rate. Also, if your commute has decreased, your insurance company should offer you a lower rate than you are currently paying. Don’t cut too many corners though; insurance can save you a big bundle if something bad happens.

Postpone purchases

If you believe the income reduction will be temporary, put off purchases that are necessary, but not urgent, until your income is back up. If the reduction is more permanent, it is a good idea to get in the habit of postponing purchases for awhile anyway. I have discovered that by keeping a list of all our “needs” instead of purchasing them right away, sometimes they go away or are fulfilled by unexpected sources. For example, when we were in Germany, we were living on an extremely tight budget and only had one pair of gloves between the two of us. I placed gloves on my needs list and watched the prices very carefully. One day in the mail we received a package that had gloves in it, so I never had to buy them after all. A few weeks later I noticed that gloves were on 50% clearance sale and I could have bought them at that time if they hadn’t been given to me.

Look carefully at your spending, then redo your budget.

If you don’t have a budget, now is a great time to get one going. Having a workable budget greatly reduces the chance that your income decrease will require you to get into debt. Track every penny of your spending for at least a week (a month is better), and categorize your expenses. Now, write down the amount of your new income and the exact amount that you are short every month. Once you know how much to cut from your spending, it will be easier to decide what to cut from your expenses. The first things to be reduced or eliminated are usually entertainment expenses, and superfluous purchases. After that, many people examine their food spending and opt for more careful food shopping. Next, do more shopping on needed items to ensure you are getting the best deal and consider buying some things used. Careful shopping can save you small dollars on everyday items and hundreds of dollars on large purchases.

Supplement your income with extra work

Once you have trimmed the fat from your expenses, you can often make things a little more comfortable for your family by doing a little extra work here and there. If your employer offers overtime, you may decide that it is beneficial to work a few extra hours here and there. If you don’t work, you might decide to start a little service business such as child-care, home cleaning, errand running, newspaper throwing etc. Depending on how much you work, you might make anywhere between forty to several hundred dollars per month.

Special Techniques for Drastic Income Reduction

When I opted to become a stay-at-home mom, our income instantly went from middle-class to lower class because my husband was still in school. Through very careful planning and use of the techniques above, we were able to stay completely out of debt (aside from our mortgage and a very small student loan). Sometimes though, the techniques above for one reason or another will not bring you the amount of spending decrease that you really need, so here are some more drastic solutions.

Lower your retirement contribution percentage

Do not, however, take a loan from your retirement account! Also, when your income is more stable, be sure to increase your contribution level again.

Consider selling the extra car if you have one

Cars are a huge income drain—the payment, the gas, the insurance, the maintenance. If you do not require the car to get to work every day, consider selling it under these circumstances:

• You have the means to get somewhere if you really needed to; ie public transportation, a friend, a bike, a rental car

• You are not “upside down” on it. Owing more on a car than it is worth is a really difficult situation. You kind of get stuck with the car unless you are willing to fork over the cash to pay down the loan or ruin your credit through a voluntary repo.

Alternatively, if you did not foresee your income drop, you may have purchased a vehicle that was more luxurious than you can now afford. Consider selling it (privately) and purchasing a less-expensive vehicle.