How to Prepare For and Deal With an Income Emergency

What's Hot

How to Cut the Cable TV Cord in 2017Family

8 Major Freebies and Discounts You Get With Amazon PrimeSave

Study: People Who Curse Are More HonestFamily

8 Creative Ways to Clear ClutterAround The House

15 Things You Should Always Buy at a Dollar StoreMore

Pay $2 and Get Unlimited Wendy’s Frosty Treats in 2017Family

5 Reasons to Shop for a Home in DecemberFamily

This Free Software Brings Old Laptops Back to LifeMore

Should You Donate to Wreaths Across America? A Lesson in Charitable GivingAround The House

6 Reasons Why Savers Are Sexier Than SpendersCredit & Debt

Resolutions 2017: Save More Money Using 5 Simple TricksCredit & Debt

10 Free Things That Used to Cost MoneyAround The House

7 New Year’s Resolutions to Make With Your KidsFamily

10 Simple Money Moves to Make Before the New YearFamily

The 3 Golden Rules of Lending to Friends and FamilyBorrow

Turns out, a lot of people in all income brackets are ill prepared to deal with financial shocks. Here's how to build a buffer and what to do if you have a sudden loss of income.

If a financial calamity like a layoff or illness hit you today, would you be ready?

Brian Watson suddenly saw his hours cut back at his job as a customer service representative.

The abrupt loss of income left him fighting for financial survival. In a panic, he got a credit card to help cover the interim, but he knew it was a bad idea.

“I was having trouble sleeping when I lost the hours,” Watson told Consolidated Credit, a credit counseling service in Florida.

He’s not alone.

A recent Federal Reserve Board survey indicates that nearly 1 in 4 households faced a financial crisis in the previous year. The top financial hardship experiences were:

  • 37 percent: Job loss of respondent, spouse or both
  • 37 percent: Health emergency
  • 29 percent: Work hours/pay cut back

People in all income brackets “struggle to maintain a financial safety net that could minimize the repercussions from such events,” the report said.

In a “financial fragility” test, the Fed asked how people would handle a small-scale disruption that would require them to come up with $400. Just over half (53 percent) reported they could fairly easily pay $400 entirely using cash, money in their checking/savings account or on a credit card that they would pay in full at their next statement. But nearly half, the remaining 47 percent, said that they simply could not cover the expense (14 percent), would sell something (10 percent), would pay with a credit card that they pay off over time (18 percent), borrow from friends or family (13 percent), or use a payday loan (2 percent).

What can you do when an income emergency hits? Take these three crucial steps, says Money Talks News financial expert Stacy Johnson:

Step 1: Assess your situation

Take stock of your income, your bills and your savings. Create a baseline budget, the absolute minimum required for food, shelter, utilities and debt payments (such as auto loans or minimums due on credit cards).

Compare this with your household’s current income. If you see you’re not going to make it, turn to a nonprofit credit counseling agency for some free help. Counselors can help you develop a workable budget, and maybe negotiate with existing creditors.

Our partner, PowerWallet, helps you get a handle on your funds so you can stay focused on the big picture.

Step 2: Track your spending

See where your money is going now, then look for ways to save.

For example, take a bite out of food bills by cooking at home, bringing lunch to work and doing potlucks with friends instead of going out to restaurants.

“Food is a necessity — but food outside the house versus inside the house is a lifestyle choice,” says Certified Financial Planner Larry Rosenthal.

Trim your transportation costs with a carpool, or walk or ride your bike more.

“Do whatever you can to use that car less,” Johnson says.

Even with gasoline prices down recently, AAA estimates a driver this year will spend 57 cents for each mile driven. On average, Americans drive 29.2 miles a day, AAA says. That costs about $16.64 a day — or about $500 a month. Cutting just about a third of that driving, so the average is just 20 miles a day, saves nearly $160 a month.

It made a difference for Brian Watson, the customer service representative who suffered a sudden loss of work hours.

“I started combining trips, which allowed me to decrease the amount of gas that I used in a month,” he said.

Step 3: Trim your monthly expenses

Take a look at your utilities, cable and cellphone bills. These may be small, but they add up. Look at each one individually, and see where you can cut. There’s plenty you can do to cut the cost of cooling a home, from using awnings to turning up the temperature on your air conditioner. You can negotiate lower cable bills, and even cut your cellphone bill in half.

Plan ahead

You can also take steps now to prepare for any financial crisis.

  • Pay down debt so you can redirect your income toward savings.
  • Hoard any windfalls, even of small amounts of cash.
  • Track your spending and find where you can reallocate money toward savings.
  • See if your employer has a plan that automatically deposits a portion of your pay into a savings, not checking, account.
  • Refinance your debt and increase your cash flow.

For more ways to build up a cushion, read: “How to Save Even When You’re Not Making Much.”

Are you comfortable with your level of emergency savings? Share with us in comments or on our Facebook page.

Stacy Johnson

It's not the usual blah, blah, blah

I know... every site you visit wants you to subscribe to their newsletter. But our news and advice is actually worth reading! For 25 years, I've been making people richer without making their eyes glaze over. You'll be glad you did. I guarantee it!


Read Next: 11 Essential Money Matters to Discuss Before Marriage

Check Out Our Hottest Deals!

We're always adding new deals and coupons that'll save you big bucks. See the deals to the right and hundreds more in our Deals section.

Click here to explore 1,911 more deals!