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Job loss – prepare by saving or debt reduction?
DFA reader Tiffany asked:
My husband just came home from work and told me he may be laid off at the end of the semester (he’s an adjunct professor at a small liberal arts college). He doesn’t seem panicked, but I know he is worried and I am VERY worried. He has never managed the household finances, we’ve agreed that’s my responsibility because I am so much more careful with our money than him. I run a small business from home and we have a daughter in day care full-time. We have a very small mortgage (10K), credit cards ($300/mo), and a household expense budget of about $3000/mo. plus $1000/mo for day-care. We have NO emergency fund. I bring in about $2500/mo. We had been using his income to pay for full-time care for our daughter, but that will end if he’s not working.
So here’s my question: Since we have advance knowledge that we may end up in a financial train wreck, how should we best prepare? Do we work on building the emergency fund, pay off the credit cards, pay off the last of the mortgage? Thanks for your advice. I am trying to be pro-active and not wait for the “crash.”
How to best prepare for job loss
Great question Tiffany. First thing is first: make sure your husband has his resume updated and is searching out and applying for every available and relevant positions.
Focus on trimming the fat. You mention having a $3,000 household expense budget… I guarantee that can be lowered if you put your mind to it. Cancel your cable, cut back phone plans, apply my grocery hacks, make your own diy household cleaners. Be creative… you will be amazed how much cash flow you can free up for savings.
Consider pulling your daughter out of day care to increase your cash flow. You mentioned working from home, and I know this would be tough, but if it is doable it will instantly free up $1,000 every month to help you prepare.
How much credit card debt do you have? When is the semester over (so we know how many months you have to prepare?) Without knowing the answers to those two questions, this is what I would do if I were in your situation.
1. Save $1,000 in a high yield savings account.
The first thing you need to do is give yourself some semblance of monetary security. You mentioned having no money saved in your emergency fund, and that needs to change right away. Save some money… at least $1,000 for now.
2. Forget about paying off the mortgage for now
Unless you have some unique circumstance surrounding your mortgage it is probably your lowest rate debt and is also secured by the home, so put mortgage repayment on the far back burner.
3. Pay off your credit card debt
If your credit card debt is minimal, go ahead and pay it off. By minimal I mean minimal compared to your monthly cash flow. If you can pay this debt off within a month or two… go ahead and do it. If you owe multiple thousands and it would take you longer to pay off, then just increase your monthly payments while saving simultaneously. With job loss looming, I would encourage you to save 75% of your available cash flow and put the remaining 25% toward your credit card debt.
4. Save money
Continue saving money up until the day your husbands employment ends. Depending on how much time you have, if you can save $1,000 each month on day care and get that credit card debt out of the way, you should be able to build up quite a bit of cash. No liquid cash means no security.
Update his resume and start the job hunt. Reduce your household expenses wherever possible. Seriously consider pulling your daughter out of day care (even if just for a few months – it will be hard but the pay off will help your situation immensely.) Save at least $1,000 to get your emergency fund started. Pay off your credit cards. Save more money.
Remember to bring your situation before the Lord in prayer. He cares for you more than you could ever imagine and is always waiting to help you… you just have to ask.
“Consider the lilies how they grow: they toil not, they spin not; and yet I say unto you, that Solomon in all his glory was not arrayed like one of these. If then God so clothe the grass, which is to day in the field, and to morrow is cast into the oven; how much more will he clothe you, O ye of little faith? And seek not ye what ye shall eat, or what ye shall drink, neither be ye of doubtful mind. For all these things do the nations of the world seek after: and your Father knoweth that ye have need of these things. But rather seek ye the kingdom of God; and all these things shall be added unto you.” – Luke 12:27-31
Do you have any other advice for Tiffany?
Have something to add? Please share your wisdom and experience and help point Tiffany in the right direction. Thanks!
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