At one point or another in life, those of us in the ranks of the employed, may find ourselves lacking a job; which, in turn, leads to a gap in income. Now, income gaps do not have to be scary, but no matter how prepared you are, they are still stressful. I currently find myself in this very situation and despite our preparedness I have to remind myself regularly to not panic.
I recently had a long-term contract that was my overwhelming source of income, come to an end. A long-term contract to replace has been indefinitely delayed, and a short-term filler project was cancelled. Right around this same time, we had our first losing month in the balances on our retirement accounts, and we had an already-planned-and-paid-for vacation on the horizon. These factors combined have caused some stress, however, we have laid the ground work to make it through with minimal damage:
- Depending how we split the bills, we have kept expenses attributable to me at about 2/5 of pre-tax income. This is mostly housing and Costco runs. Kelly’s income has a similar expense ratio, meaning that overall we have been living within our means.
- Between cash held in my business account I have 3 months expenses set aside plus his receivables. We typically use this money for extra retirement savings if not otherwise needed. This amounts to a pretty bare bones emergency fund. But, we’ve been keeping it small for a reason. We are working to pay-off our respective divorce-related debts–due to be paid off by April!. We have also started paying for medical expenses out of our HSA, rather than paying out of pocket (see our HSA episode).
- Depending on how long this period of instability lasts, we may not meet our savings goals for the year. Although this is disappointing, even though we are unable to contribute to savings for October and November, we will only be pulled back from ahead-of-plan to on-plan.
- Looking at the big picture, a bad few months due to lower income or a drop in the value of retirement investments needs to be put into perspective. It’s part of the normal cycle and isn’t a big percentage change. We also see the impact on our long-term plan and know that we are OK on that score too.
As with most things, preparation is key. To this end, here are the strategies we follow to mitigate extreme financial breakdown:
- Level-set your lifestyle. Live below your means so that you don’t have to replace so much income when a gap occurs.
- Have an emergency fund. Have some cash to cover bills. The lower those bills are, the less cash you need, and the longer that cash will last.
- Save extra aggressively when you can. Get ahead of savings goals so that temporarily stopping saving will bring you back to plan rather than immediately getting you behind.
- Don’t Panic. Formulate and execute a specific plan when the gap occurs. Reduce discretionary expenses to a minimum and put off what you can. This shouldn’t feel too bad if you have been living within your means to this point (see step 1).
- Stay positive. Outside of income concerns its important to try and stay positive. Remain productive! Get up at the same time you usually do, or earlier! Devote time to networking with old colleagues and friends. Set up some lunches, interview and maybe go to a seminar.
- Build Skills. Work on projects and tasks that you don’t normally have time for but are helpful for professional development. Learn a new skill or tool that might help once you get back to paying work.
Currently, I am working on-spec for a project that has not been approved–although we expect it will be approved in a few months). I am also working on a start-up project (for equity), and aggressively seeking new contracts and work. If I can get the work done now, I will be able to bill for it later once I am working on something else. Even the contracts fall through I will have kept some skills fresh, stayed engaged, and created something potentially useful on another project.
Income gaps are never fun. They are stressful and worrisome. But, if you do your best to prepare, even with low emergency funds, you can and will make it through. Remember, Don’t Panic!
Steffan (& Kelly)