Life can be unpredictable.
One day you’re managing your finances just fine in a two-income household. Then something happens — a layoff, an injury, a separation — and you’re left with one paycheck to support your lifestyle.
How do you cover your expenses with this reduced income? How do you pay your bills? Before the financial panic sets in, here are a few things you can do.
1. Assess the Entire Situation
Losing a major source of income — and dealing with whatever event led up it — may feel devastating, but try not to spiral into despair.
“Do not panic,” said Michael Gerstman, CEO of Gerstman Financial Group. “Take a moment to breathe. You need to assess where you are financially at that moment.”
Take stock of the funds you have set aside for emergencies. Also figure out if there’s any money that’ll be coming in as a result of the income loss — unemployment benefits, a severance package, alimony, child support or disability or life insurance payouts.
As you process the fact that you’ll need to make things work on less than you’re used to, take note of any upsides you can find. A layoff can give you or your spouse the time to start a business or the opportunity to cut child care costs and become a stay-at-home parent. A separation could give you the freedom to move to where you want to live — perhaps a place with a lower cost of living.
There’s not always going to be a glaring benefit, but it’s important to evaluate the full picture. You’re losing a major source of income, but can you also eliminate any regular expenses as a result?
2. Take Out Your Budget and Start Making Cuts
If you had been lax about sticking to a budget, now’s the time to get serious.
“Most people don’t have a budget, and it often takes something like a job loss to encourage them to create one,” said Liz Frazier, a New York-based financial planner and author of the upcoming book “Beyond Piggy Banks and Lemonade Stands.”
If that describes you, now’s the time to actually start a budget. Reviewing your spending habits in preparation for creating a budget may help you realize where you’ve been overspending, Frazier said.
Two budgeting strategies that are helpful when resources are limited are the zero-based budget method and the cash envelope system. With zero-based budgeting, you account for every dollar you’re spending. The cash envelope system helps you adhere to your spending limits.
After a major income loss, it’s crucial to cut out expenses that aren’t necessities. Depending on your situation, you may need to resort to a bare-bones budget where you’re only covering absolute essentials.
Ariel Ward, a financial adviser with Abacus Wealth Partners, said to check your budget for nonessential recurring charges, such as gym memberships and cable. She advises using cash-flow tracking software — like Mint or You Need a Budget — to keep track of where your money is going.
Don’t just settle with cutting out your discretionary spending. Take a magnifying glass to your necessary expenses, too. Can you switch to a less expensive cell phone service or car insurance provider? Can you cut costs on utilities or call your credit card company to ask for a lower interest rate?
3. Find New Ways to Bring In Money
“For a family struggling to meet basic needs, from a practical short-term standpoint, they need to look for a way to add additional income to their budget,” Ward said. “It could be taking a second job or finding a gig they can fit into their current schedule.”
Other ways to increase your income include taking on extra shifts, working overtime, applying to higher-paying jobs or asking for a raise. If you tend to end up with a large refund when you file your income taxes, you should adjust your tax withholdings so you end up with more take-home pay.
There are other ways to make extra cash unrelated to employment. You can rent out a spare room on Airbnb — or temporarily stay with friends or family while you rent out your entire house. You could sell unused items around your home or even sell a car and downsize to a one-car household.
4. Seek Out Assistance
Asking for help can feel uncomfortable if you’re used to handling everything yourself. But there’s nothing wrong with seeking out assistance when in need.
Talk to your creditors or service providers if you think you’ll have trouble paying your bills. You might qualify for a hardship program that’ll give you temporary financial relief. If you can come up with the money, but not by your current due date, ask if you can adjust your payment date.
If your situation is more dire, call the 211 network, a United Way service that helps people in financial crisis get food, housing and health care assistance. Your local department of health and human services is another helpful place to turn.
Frazier also recommends sharing your situation with your personal network, like your family, friends, coworkers or church members.
“Let them know your struggles, and maybe they will have some ideas for child care options, available jobs, meal services or other community resources,” she said.
While you’re in crisis mode, don’t ignore your need for emotional support. Going from a two-income to a one-income household usually involves greater loss than just money. Whether you’re coping with the loss of a partner, dealing with a physical disability, losing part of your identity after a layoff or feeling the stress of unexpectedly becoming your family’s sole breadwinner, it’s important to address the challenges you’re facing outside of the financial ones.
5. Be Cautious About Taking on Debt
When you’re suffering from a major loss in income, you might be tempted to do whatever it takes to stay afloat financially.
“Depending on the severity of the crisis … any and all assets should be considered to be accessed to get through this,” Gerstman said.
That might mean taking out a home equity line of credit or tapping into your retirement accounts, he said.
But Frazier recommends more caution. You should also be aware of how taking on debt will affect your financial future. Taking out loans or charging everything on your credit card provides temporary relief, but the payments and interest will only add to your financial struggles in the long term, she said.
“Unless your financial problems are short term and you just need a bridge to get to the other side, do everything you can to avoid getting into debt,” she said.
Gerstman and Frazier may differ when it comes to taking on debt during a financial crisis, but one thing they agree on is avoiding payday loans. The exorbitant interest rates, fees and loan terms can trap borrowers in a lending cycle that goes on and on as their debt grows larger and larger.
“That could be a situation from which you can never recover,” Gerstman said.
Nicole Dow is a senior writer at The Penny Hoarder.