Job Loss – Save Money or Get Out of Debt?

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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.

In closing

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 cardsSave 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!

Have a question of your own?  Ask Matt Jabs for free!  :)

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1 Leslie

I had a month to prepare for a job loss and I immediately starting building my emergency savings. Mainly because it made me feel better.

2 Neil

$3000 in household expenses with minimal mortgage and not including daycare is too much. (That’s my household budget with a quarter million mortgage) Cut back on extraneous expenses, and you’ll find that there’s no reason you can’t live on $2500. If you can’t pull your daughter out of daycare while your husband is still working, you certainly can when he’s unemployed. Pay off credit cards ASAP, they’re a ripoff (and can be reborrowed if it’s truly an emergency). If they’re too large to pay off entirely, investigate replacing them with a line of credit which should charge a fraction of the interest.

You’re in a position where you certainly should be able to get by on one income, but you might also look into whether you can raise that income. Are you stretched to the max with your job, or are there growth opportunities? Raising income frees up much more money than any savings technique could

3 FernWise

I’d see if I could ramp up the home business, cut expenses by a mere $500 a month, and if husband gets laid off drop child care. While it might take some time to ramp up the business, just cutting $500 a month would mean that income matches expenses.

Of course, I expect that with husband laid off there may also be an issue of health insurance, which none of us have yet addressed.

So, what skills other than ‘professoring’ does husband have, that he can use to start his own business? Can he tutor, can he get into article writing, can he do small engine repair, etc?

4 Budgeting in the Fun Stuff

I agree with the advice. While your husband is looking for new jobs, cut back on any unnecessary expenses and save up an emergency fund. Best case scenario, he doesn’t get laid off or gets an even better job…an emergency fund is still a good thing to have.

5 Paul @ FiscalGeek

Myself if I were facing this situation, I agree with Matt’s advice with the exception that I would cut my expenses drastically and switch to minimum payments on my debts etc and build that emergency fund asap. You need that cash buffer right now to avoid adding more debt to your situation. Give yourself a good base to work from and take it as a nice cushion when he finds his next job. Then you can resume the debt paydown. That’s my advice, worry about your foundation first and foremost with a looming emergency. Big hugs to you guys.

6 Michelle Traudt

We had to go through this last year and are still paying off a large amount of debt. I agree with saving for an emergency fund, paying off any debt you can and reducing your expenses as much as possible. We got rid of cable, our cleaning service, and we stopped eating out as much…now it’s a treat to eat out. We also were able to get two other people to share our boat with us (because we couldn’t sell it) and that off-sets the price. We’ve sold a bunch of stuff on craiglist too, to pay for miscellaneous stuff. When you really need to, you’ll be amazed at how much you can minimize what you own and what you owe.

7 Kevin@OutOfYourRut

My vote goes to the emergency fund. Since cash flow will be an issue the idea of paying down debt is something that should wait until her husband is re-employed. They’ll need every ounce of liquidity to get through going from a two paycheck household to a one.

If they pay off debt and their credit lines are frozen, they’ll be in a very deep hole.

One exception: IF they have the funds to payoff their mortgage, that could be a huge boost to the monthly cash flow. But I assume since they have no emergency fund at the moment, that this won’t be possible.

8 MyFinancialObjectives

I agree with Matt, you have to lower your living expenses per month. If you go by the typical 3-6 month stash of living expenses for the worst case scenario happens, you need between $6000 and $12,000 in a reserve fund. If you could lower your living expenses even by $1000 per month, you would be in much better shape.

I also agree that your husband needs to beef up his resume and start looking NOW. Finding a job can be a VERY long process. Advise him to start looking as if he were already laid off. Don’t wait till it actually happens to start looking, your already behind.

Finally I also agree with Matt that you need to both pay off Credit card debt first, don’t worry about paying down mortgage right now, and get at least $1000 in an emergency fun, though I would say at least $3000.

9 Steve in W MA

The end of the semester is in less than 2 months. DH is probably taking home $2500 per month which, less the daycare, amounts to 3000 free dollars over the period April 1-June 1. If that $300 monthly for the credit card is the minimum payment then that likely represents as much as 15,000 worth of debt. I think if that’s the case then there’s little cash for meaningful debt paydown right now, so I’d say basically Matt’s advice is good except for I’d skip trying to pay the credit cards off beyond the minimum payments (plus $10) and hang onto all available free cash ($3000). The rest of the plan is sound.

10 Steve in W MA

I agree that $3000 in household expenses (not including $1000 in daycare) with only a $10,000 mortgage is *off the charts*.

11 Jolyn@Budgets are the New Black

Tiffany,
I w/also focus on the job hunt, not limiting myself to my specific field. (Hello, “Deliver Away Debt”, anyone?) If your husband loses his job w/out another one lined up, he can stay home w/your daughter during the day and continue to job hunt, saving on daycare, while also working part-time in the evenings doing whatever will get him a paycheck. Just work! You might be amazed how much delivering pizzas can bring in…

Other than that, an emergency fund should be a priority for anyone whose job is uncertain, advance notice or not.

To those who say $3000 is too much for expenses with only a $10,000 mortgage… Tiffany did not say how much their mortgage payments were; just how much they still owed.

That being said, I w/certainly look for ways to trim the budget. Food is usually the biggest culprit, especially with two working parents. Good luck!

12 Olivia

I’m assuming you’ll apply the good counsel given by others to cut expenses, and now you’re wondering where to begin. Several resources worth a look see. If nothing else for encouragement that there are options.
The Tightwad Gazette by Amy Dacyzyn (try interlibrary loan)
Square Foot Gardening by Mel Bartholomew
More With Less Cookbook by Doris Longacre

Online resource
Dollar Stretcher (archives and forum) You will find alot of people in the same boat and a good bit of wise counsel.

Every expense is either necessary or optional. Necessary expenses can be trimmed too. Even though you’re being thrown into this head first, there will be a learning curve. It’s amazing what you can do if you’re up against it though. Brainstorm, talk about it. You two are in this together and the tendency for the budgeter is to feel the entire weight. Share the burden with your husband, pray together, write it out so that both of you have the same reference point.

Depending on what your husband teaches and if he has background in grade and high school situations, he may consider working for Sylvan Learning Centers as a lesson administrator, as a private tutor (there are agencies that place people), as a home school portfolio evaluator (check with your school district to see what the requirements are, then a home school coop or support group for leads), as a sub in a regular teaching situation. Also depending on what he teaches he may be able to do a summer camp program. Our local state college offers all kinds of summer courses for kids. (Something like robotics or computers, acting, music, wildlife, etc.) Somone has to teach those.

One thing worth investing in, if you haven’t already, is a crock pot. Sounds silly I know, but it makes a big difference if you’re working, not having to fuss when you’re tired, especially if you’re under stress.

You will come through this.

13 Carlos Frank

Tiffany- first off thanks for allowing your question to be posted on a public forum, the answers you get will help a lot of people who are not willing to be as transparent as your being.

Like Dave Ramsey would say, “If I woke up tomorrow in your shoes I would…

And I’ve actually been in your shoes 3 times in my life in the period of 6 years! Most recently in 2008. What helped us was definitely first putting our trust in God and that he is our source and that the layoff was only a temporal situation! And at the same time we started saving as much money as possible to give us as big as cushion as possible. We cut back on all luxury items (cable, eating out ect). At this point I would not suggest sending any extra payments towards any debts. Make the minimum required payments and save as much money as possible. And when the smoke clears and the income situation is more secure you can take the money that you saved above and beyond $1000 to payoff debt!

14 BG

I’d like to mention that there are a lot of divorces born from financially devastated households. Always remember that a husband & wife are on the _same_ team. I never doubt the power of a highly motivated couple to accomplish whatever it is they want.

Stick together, love each other, communicate!: You will pull through these hard times not just OK, but better than before.

15 Carol Schultz-Weil

Tiffany has taken the best first step – asking. And, she is getting great advice. The other thing I would add is start a food storage program. Having some extra items on hand will not only cut expenses but will add some piece of mind. This was the advice that ended up making Joseph the number 2 man in Egypt as recorded in Genesis. Hope you will check out my blog http://inthetrenches2009.blogspot.com The book has many more ideas that will assist in making some rapid changes to get you prepared.

16 MAG

Great advice. The fact that her husband has any sort of notice about possible being laid off is a blessing. Knowing that it “might” happen definitely sets the motion of looking for a new job and straightening up your monthly budget in advance. Good luck!

17 Monroe on a Budget

I organized a huge list of cost-cutting tips into my series called the Downsized Budget Plan: How and Where to Cut Back http://tinyurl.com/a66oqg

some key points from that and other items on my blog:

* Many cost-cutting steps that are very effective in the long run require an investment of time, money or both up front. But two months is enough time to get some of those plans into action – specifically on the grocery bill. Do look into Angel Food Ministries / Great Food for All or any of the other “grocery by the box” programs that are in your area. (I use AF!) The cleaning supplies changeover mentioned above also can be phased in during the next few weeks.

* Kid expenses can be helped through second-hand shopping. The metro Detroit area / southeast Michigan has a custom called Mom 2 Mom Sales and those are multi-family garage sales with ONLY kids’ stuff. This is very handy for moms with tots to sell or buy clothing, furniture and accessories.

* Get your legal and financial paperwork in order now. If you end up applying for government or charity assistance, you often need to provide documents such as most recent income statements and a legal birth certificate for the child. Even the unemployment insurance agency details can take time to settle out – so you want to make that call or online application the day you are eligible.

* If you have already bought tickets or booked reservations for something, you may as well use them. Just don’t do anything extra. We had tickets to an IMAX show at The Henry Ford one week when my husband got a layoff notice. We went to the IMAX since the money was already spent. We did not, however, also visit the museum the same day like we had planned. (We hadn’t bought those tickets yet.)

18 Neil

Most companies are good about having employees come in and talk about managing for retirement, but that’s only part of the equation….I think that companies should also lead a broader discussion incorporating workers’ annual earnings, savings rates, and prudent debt levels. Given the fact that the majority of Americans have been in debt for the past 10 years and now their is not enough money to pay off the debt, employers would be doing a great service to their employees if they contributed to their personal finances in a more present way. A simple seminar could do the trick.

19 Brandon Schmid

Yeah, I would say for sure the most important thing to do is increase the cash flow. Do whatever you can so if your husband can’t find work for a while then at least the damage will be minimal.

Also, I would tell him to get a job…..anywhere! When times got tough for me I was working at a local grocery store during the day and cleaning toliets and mopping floors during the evenings and weekend. Whatever I didn’t care. It was bringing in an extra $1500 a month.

Cheers!

Brandon

20 Jen

How do I pay off a Student loan? I’m out of work a lot.
Due to my age It’s hard to get work.

21 Matt Jabs

Do you have a mobile phone or cable/satellite TV or other terminable expenses?

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