What You Can Do If Your Income Drops

A reader recently wrote to me with this problem;

I have never done this before, but I cannot pay my bills  Currently they are all current.  But, with huge pay cut I got from being a state employee in California, I can no longer pay the bills.  Do I save up some funds and then offer the settlement? I am currently broke.

Signed Broke in California

Dear Broke;

While this is a serious problem, for sure, it doesn’t have to ruin you.  No matter how bad it seems at first glance, there are always step you can take to get you out of the mess that you’ve gotten into.You can work your way to good financial health, and I can give you a few ideas to get you started.

Rule number one – DON’T PANIC! Panic and fear usually force us to make bad financial decisions – decisions that we will later regret. So, take a deep breath, all is not lost. You are still in control here – if you keep your hands on the steering wheel. You must remain level headed and in charge. Then, you’ll be able to deal with your finances in a clear and rational manner, and make good decisions.

Let’s look at the positive first. All of your bills are current! Do you realize what a great thing this is? You’ve got some breathing room to figure out what you can do to manage the shortage. Time is a precious commodity – and you’ve got time! Congratulations for staying current! I’m assuming that, since you’re current, your credit is decent.  Work hard to keep a good name, as this can really help you.

When you talk of saving up funds and offering a settlement, I assume you’re thinking about stopping payment of your debts to force your creditors into some type of settlement. I think you’re jumping the gun. Settlement will definitely damage your credit and make future emergencies very difficult  to weather. Since you have some time, you have many options open to you that others in a more dire situation wouldn’t have . Settlement is a short-term solution that will have many long-term consequences. Before you take a big step like this, you really should take these steps first.

Keep The Lights On

Keep your household running, first and foremost. You and your family need to have a roof over your heads, food in the fridge, stay healthy and maintain a reliable vehicle. Before you make any payments on debt, make sure that you take care of your family and home.

• Home. Stay current on your mortgage or rent. Pay the utilities (gas, electric,trash, etc.), insurance and taxes (if applicable). Keep the home in good safe repair.

• Take Care Of You And Your Family. Keep food in the fridge. Pay any health insurance premiums. Pay any basic expenses that directly affect the well being of you or your family.

• Keep Your Car In Good Shape. Put gas in the tank, change the oil, get new tires if needed. Keep your car insurance current – don’t skimp here. You will need  reliable transportation to get you to and from work. Do whatever is necessary for basic transportation (heavy on BASIC).

Make A Budget

You have to know exactly where every nickel is spent – “every dollar has a name” says Dave Ramsey. If you don’t have one, make a budget – tonight!  This is critical to start you on the path to a cure. A budget doesn’t have to be fancy – get a spiral notebook, gather all of your monthly bills and get writing. Find out exactly where your income is going.

Put That Budget To Work

Use the above as a guide to determine what your basic expenses are – this will be your minimum monthly requirement to stay operational. Any expenses above this are optional – meals out, entertainment, clothing, vacations, electronics, etc.

At this point, you should have a pretty good idea what it will cost to support you and your family.

Your Debt

You will need to get a total of all of your debt, and all of the monthly payments on that debt. Write this in the same notebook you used for your budget. Add the monthly debt payments to your expenses, and now you have a total monthly outgo. Since your salary was cut, this total monthly outgo is now probably more than your income.

Since I don’t recommend settlement at this point, you have two options.

• Increase your income.
• Reduce your expenses.

In the short term, increasing income can be difficult. You can look for a part time job, but in this economy, it could take time.  But, you can cut your expenses to the bone – and still make your debt payments. And, you will have to make sacrifices.

It’s amazing how much money you can save just by cutting a few luxuries from your life. For example;

• Cut out the Starbucks. At $5 per cup, you could save $1250 per year by making do with free coffee from work.

• Get your movies at the library. If you watch just 3 rented movies per week, you could save up to $750 each year if you shop (free) for movies at your local library.

• Give up smoking. I know – easier said than done. But, the savings – save over $1400 each year by giving up a pack-a-day habit.

• No more bottled water. Did you know that bottled water is more expensive than gasoline? Save at least $500 by drinking tap water.

That’s almost $4000 in savings each year if you were to do all the above!  If you have cut what you can and find you still can’t make your monthly debt payments, you still have some options.

• Debt consolidation loan. If your credit is still good, you may see some big savings if you refinance of those high interest rate debts under a lower interest rate personal loan at your local bank or credit union. This could give you the breathing room you need to get those debts paid off.

• Negotiate with your creditors. When all else fails, be honest. Call your credit card companies and let them know your situation, and that you’re having trouble meeting your obligations. Ask for help – temporary interest rate reductions, payment holiday (skip a few payments). If you have a good record, many will bend over backward to help you out. But, you must keep your word and make good on your promises and your debt.

• Move credit card debt to low or no interest rate cards – temporarily. A few credit cards will offer a teaser rate of zero to a few percent interest for up to 6 months to get your business (and your balances). The reduction in interest could give you some breathing room – just remember that the low rates will end, so be prepared to accept the higher payments or move the balances to another low interest rate card.

Change Your Habits

This should go without saying at this point – but I’ll say it – STOP CHARGING NON-ESSENTIALS ON CREDIT CARDS! Some financial “gurus” say that you should use NO credit cards. I say that one for monthly essentials is fine if YOU PAY OFF THE BALANCE MONTHLY!

This is just a start – once you balance the income with the outgo, you will need to concentrate on getting that debt paid off.

I really recommend that you get a copy of Dave Ramsey’s book “The Financial Peace Planner.” It’s cheap and full of practical advice.

And, if you haven’t gotten a copy of my free report “3 Easy Secrets To Start Debt Cure Now,” I highly recommend you do so now.

Oh, and one more thing – swear to yourself that you’ll use this lesson to get out of debt ASAP and stay out of debt in the future.  Life has plenty of challenges and concerns – why complicate things with debt?

Dan