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Dealing with an Income Interruption

Dealing with an Income Interruption

August 11, 2020

I hope that if any of my readers, or their friends or family are facing an income crisis due to current events, the following tips may prove helpful. 

For many people, even those who lost their jobs due to the pandemic, 2020 has been experienced as a health crisis more than a financial crisis.  The very generous unemployment benefits passed by Congress in March as the economy went into its initial lockdown ensured that many, if not most, unemployed workers ended up making as much or more than they did before they lost their jobs.  Hopefully they were able to take advantage of any windfall to pay down some debt, or beef up their emergency fund.

I still think that Congress and the Administration will come to terms on a “Round 2” of extended and increased benefits, but it does appear that it might take a while.  So many of these individuals will soon start to feel the pinch of dramatically reduced income.  So what steps does a prudent person take as one’s income is suddenly reduced?  

First, define the “Essential Non-Negotiables”  This is primarily your rent or mortgage.  It is any item that MUST be paid to keep your family safe, and there really isn’t much you can do in the short term to reduce the expense.  Whatever is left after paying your rent/mortgage is available for the below items.  Oh, it may be possible, at least in this particular crisis, to call your mortgage company and modify your loan payment schedule.  If you are a renter, your landlord may not be so accommodating – he or she is likely under some financial strain himself. 

Next take a long hard look at the “Essential but Negotiable” items.  This includes those categories which, while “essential” are within your power to influence through your buying behavior.  The goal is to get these items, when added to your rent / mortgage, to be less than your income.  That might mean taking a long hard look at your spending.  For example:

Groceries:  You need to eat, but you don’t need to eat Rib Eye steaks and fresh swordfish.  If you haven’t done so before, now is the time to really look at food costs.  Plan several ultra low cost meals each week – rice and beans, etc.  Scour the internet (or good ole Sunday paper) for coupons and bargains. 

Utilities:  You need to keep the lights on, so paying the utility bills is a must, but now isn’t the time to be splurging on the premium cable subscription.  Run the A/C sparingly, buy a fan, turn off the lights. 

Insurance.  Don’t let your essential life insurance or auto insurance lapse…but it might be a time to question your coverage.  Do you really need that whole life policy – or can you meet your goals with cheaper term?  Can you adjust deductibles, eliminate collision on older cars, etc. to save some money? 

Auto Loan / Lease.   Our preferred method of owning a car is to buy a car for cash.  If all you can afford is $3500, then buy a $3500 clunker and start to save up $300/month for a new car (instead of paying $400 to the bank).  When you have enough to “trade up” you do so – for cash!  When times get tough (like now) you will be happy not to have that extra “must do” monthly expense.  But lets say you have an outstanding loan balance, what can you do?  There are a few options. 

  1. Call the finance company and ask for accommodation. In this crisis in particular, lenders have been more flexible than usual.  Maybe you can get a temporarily reduced payment, or defer a payment or two.  Don’t just miss payments without calling the lender first.  
  2. If the loan is older, is it possible to sell the car and payoff the loan? This is getting rare due to loan terms extending longer than they used to – but if so, you may want to “trade down” to get out of an expensive loan. 
  3. Leases are more problematic. You don’t really own the car as you do when you buy a car with a traditional loan, so there is no “equity” and you are contractually obligated to make all the payments.  Still, you may be able to work out an accommodation with the lender if you are experiencing temporary employment interruption.  Can’t hurt to try. 


So what if despite your best efforts at expense reduction you can’t meet all the “Essential” bills?   

Well, if you have that 3-6 month emergency fund that we financial planners always recommend, now is the time to use it.  The better job you do reducing the expenses, the longer it will last, so don’t shortcut the previously mentioned expense analysis. 

Lastly, cut “Discretionary Expenses” to the bone.  This is “Everything else” that is “non-essential”.  And by essential, we mean you absolutely, positively can’t do without even for a month.  Stop buying take out – see groceries above.  Cancel subscriptions.  Defer clothing purchases.  Cut back on anything and everything that isn’t absolutely essential for your family’s safety and well-being.  Find low cost ways to entertain and amuse yourself.  Re-read an old book.  Rebuild that jigsaw puzzle you kept in the closet.  Play an old board game. 

What about Credit Card and other Debt Payments?  Of course, if you don't make your credit card payments, your credit score will suffer, but credit scores can be rebuilt. Don't be so desperate to protect your credit score that you put your family's security at risk.  Your essentials as described above must always come first.  Unlike your mortgage, or your auto lender, the credit card company doesn't really have a lot of leverage over you.  They can't take your home.  They can't take your car.  The debt is "unsecured" - meaning they have no claim on anything you own as "collateral".  Their only recourse is to sue you, take you to court, and try to force you to pay.  That tends to be a clunky and expensive process, so If you don't pay for several months, the card company may turn over the debt to a collection agency whose objective is to recover as much of the debt as possible. You can often delay this transfer to collection by communicating with the credit card company, explaining the situation, and trying to work out some kind of "forbearance" agreement.

If the credit card does turn you over to collection, be aware that collection agencies may be notoriously aggressive in calling to collect on debts.  If that happens, don't ignore them.  Know your rights, there are limits to what they can and can't say / do to you.  Always be honest but firm and indicate willingness to work things out.  Take notes, get the name of the person and the company they represent before you talk to them. Avoid giving away money you need for essentials - you will only make things worse!  Also, avoid borrowing from Peter to pay Paul (adding to one debt to payoff another). You may choose to commit to a minimal payment to keep the collectors at bay through the rest of your crisis, then when your situation improves you can make them an offer (lowball) to settle the debt once and for all. They likely only paid pennies on the dollar to obtain your debt, so you may likewise be able to settle the debt for much less than the full balance owed. 

Work the Income side of the equation.  Got old stuff laying around?   Maybe you can make a few bucks and clean up the basement at the same time by selling your “stuff” online.  Any odd jobs you can do for people during breaks in your job search?  On the job search, as things get desperate, you may need to change your definition of what you consider "acceptable" employment - hey, nothing is forever, and theres never any shame in putting food on the table! Even a few bucks here or there from a part time gig can help pay a utility bill or part of your car payment. 

Should you go into Debt?  The danger of debt is that it allows people in crisis to avoid taking all the cost cutting steps I outlined above.  I have a friend who I know was in difficult financial straits, her husband had lost his job, I knew they had already struggled with debt before the job loss.  When I saw them with their 3 teenage kids out at a restaurant that would have set them back by at least $150 for the evening, I have to shake my head.  I knew they were just going deeper in debt for this one night’s splurge.  Credit card debt is so expensive and interest rates so high that the hole you dig can get very deep very quick, to the point it becomes impossible to escape even once your income situation improves. Many bankruptcies are a result of credit card debt incurred following a job loss.  So before pulling out the credit card, be sure you have fully exhausted every other option and have cut your expenses to the absolute bone!