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Author Rob Phelan.
Rob Phelan
My partner and I have already planned for what would happen if one of us lost our job.
We started by getting rid of as much debt as possible and reducing our fixed expenses.
Then, we increased our savings rate and diversified our income sources.
In 2014, my future wife and I had just started living together. I had my first “adult” job as a teacher, earning triple what I had during grad school. My partner was already more established in her career as a therapist, and earning a decent income.
We quickly combined the two incomes to see what we could afford in terms of an apartment, car payments, food, subscriptions, travel, and entertainment. It wasn’t “paycheck to paycheck” in a stressful way, but there wasn’t anything left at the end of the month for saving, and investing was still an unknown word in my vocabulary.
Then, the universe threw some tough stuff our way. Physical and mental challenges threatened both of our ability to work, and since we had one source of income each, we faced the possibility of becoming a single-income household on short notice.
That threat spurred us to take action and prepare for that possibility as much as we could. We considered both our expenses, and our income, as we assembled our defenses for any potential storm ahead.
We started by reducing expenses where possible
When we looked at how much income we would need to cover all of our core expenses, we realized our consumer debt and student loans demanded a significant slice of our take-home pay. The first item on our agenda was to reduce our debt as aggressively as possible, eliminate or reducing monthly bills/subscriptions, and discuss what could be cut from our budget to get us down to the bare minimum.
Creating a plan for what would be cut, how we would shop, and where we could find extra money was an important conversation for us. By opening the communication early and forming a plan, there will be less panic if the time comes when we needed to significantly cut back. Reducing our debt load, bills, and subscriptions meant there were fewer fixed expenses to worry about if our income levels dropped.
We increased our savings rate
To pay down debt, build an emergency fund, and start investing for financial independence, meant we would need to do a better job of managing what we already had. ‘You Need a Budget’ (YNAB) was the software we turned to for co-planning and co-spending. Through the app, we were able to determine how much we wanted to spend in each category and ensure that we paid ourselves first to prepare for the future.
Our emergency fund goal started off at $1,000, but we quickly realized we were going to need a lot more to help us smooth out a job loss. We aimed for three months of normal take-home pay as the minimum we’d need to allow us to figure out alternatives and new streams of income should one of the existing ones fail. We’ve heard up to six months or more as the recommended amount for families to have, but this felt like a comfortable position for us to start, especially since my job as a teacher is one of the most stable you can have in today’s world.
The biggest shift for us was making our needs significantly less than our take-home pay. We reached a savings rate of around 20%, so we knew that if a job loss happened we could immediately stop saving. The gap we would need to make-up to cover our normal spending wouldn’t be huge, and we’d have an emergency fund to help pad the way.
We diversified our income streams
We already diversify our investments so that if one asset type or sector is down, the others will hopefully be up to help reduce the impact of the loss and keep the portfolio steady. Income is no different.
We wanted to have multiple streams of income that came from unrelated sources, so that if one disappeared, we would have others to rely on for covering our needs. Our full-time jobs still represented the majority of our income, but we also added in things like refereeing lacrosse, creating digital resources for teachers, selling artwork, freelance writing, running online courses, public speaking, and publishing a children’s book.
At one point I was working part-time as a contractor for a non-profit, creating personal finance curriculum and resources. At the time, this represented 25% of our take-home pay and when it ended during the pandemic, it was a big hit to our finances. However, since it was only one of many sources, there was still enough coming in to absorb the hit while we looked for ways to increase our other income streams.
Thinking about what we would do if we went down to a single income has been life-changing for us. While it’s not fun to dwell on black-swan events, going through “what if” scenarios with your partner, family, or in a journal, can provide great peace of mind and bring to light weaknesses in your finances.