Blogging for Change

Surviving an income reduction

by Kim McGrigg on
3/2/2009
in Personal Finance

A job loss or income reduction can be devastating. If you are facing a financial hardship, it is time for planning, not panic.

Step 1: Assess the Situation
One key to success with any financial plan is to be realistic. Start by figuring out where you stand today. To help you assess your financial situation, pull a copy of your credit reports. To obtain your free copies, visit AnnualCreditReport.com or call 877-322-8228. Try to realistically determine how long your income will be reduced. Be conservative in your estimate; in this case, it is better to be over-prepared.

Step 2: Analyze Available Resources
Now that you have a clear understanding of your current financial obligations, it is time to analyze your available resources. Once you have identified potential resources, determine which are most beneficial to tap. This could vary greatly depending on the length of time you expect your income to be reduced. In addition to your savings, you may have several available resources:

• Borrow from yourself. While cashing your IRA is not desirable, you can take a short-term loan with no penalties.
• Take a good look around you. Most likely, there are many things in and around your home that you could sell for cash. Remember, one man’s junk is another man’s treasure.
• Seek temporary employment. Secure a temporary job to help you through this set-back, even if it is not in your field of expertise.
• Consider all existing resources. Research all sources of cash. For example, you may have a life insurance policy with a cash value. Collect on monies lent to family and friends.
• Seek assistance. Contact your local city offices about benefits such as unemployment pay, food vouchers, and utility discount programs. You can also seek assistance from your local church or United Way.

Step 3: Set Priorities
If the results of your financial review indicate that you cannot realistically meet all of your obligations, you may have to set some priorities. The following is an example of how you might prioritize your financial obligations:

• First priority debts likely include your rent or mortgage, tax liabilities, insurance premiums, auto loans, and utilities.
• Second priority debts may include secured loans through finance companies.
• Third priority lenders may include retailers, hospitals, doctors, and credit cards issuers. Remember, each person will have their own unique list of priorities. Realize that just because a category of debt is listed as a third priority, does not mean it isn’t important. It simply means you need to contact the higher priority creditors first.

Step 4: Create a Plan
Changed financial circumstances call for a changed financial plan. Considering your assets, income, and your priority obligations, create a plan that is realistic and flexible. Elements of your financial plan should include:

• Cost-cutting strategies. Analyze your current expenses carefully. Sit down with your family and discuss ways to cut costs.
• A debt repayment plan. Considering your priorities, determine a reasonable monthly amount to pay each of your creditors.
• A commitment to financial recovery. Be determined to make smart financial decisions for your future. For example, do not replace income with credit card cash advances that could haunt you for years to come.

Remember that your plan needs to be realistic and flexible to work. Setting your goals too high will only cause you unnecessary frustration. Keep simple but accurate and complete records and don’t forget to predict future needs and problems.

Step 5: Contact Your Creditors
Once you have a plan, communicate with each of your creditors explaining your situation and how you plan to repay your debt. The best way to contact your creditors is in writing; after you have written your letters:

• Maintain accurate files. Before mailing your letters, make copies to keep for your files. If you must negotiate over the phone, keep detailed notes including the representative’s name, title, and phone number. Follow-up any phone conversations in writing.
• Stay organized. Keep everything in one place. Write a summary list of your financial plan for quick reference. Revisit the plan regularly to make sure you are on-track.
• Be prepared for calls. After sending your letters, you can expect some of your creditors to call with additional questions. If they do, be honest and courteous.
• Keep your end of the bargain. If you are unable to make agreed upon payments, contact your creditors immediately to renegotiate.

For more, check out one of our free Webinars.  There's a When the Income Decreases, But the Bills Don't class tomorrow night.

 

Kim McGrigg is the former Manager of Community and Media Relations for MMI.

Recommended Articles

Man sitting in front of pile of bills, trying to understand his options.
Professional Budget Advice
Make the most of every dollar and start building toward your dreams! Budget counseling is FREE and available 24/7.
Learn More
Learn more
  • Better Business Bureau A+ rating Better Business Bureau
    MMI is proud to have achieved an A+ rating from the Better Business Bureau (BBB), a nonprofit organization focused on promoting and improving marketplace trust. The BBB investigates charges of fraud against both consumers and businesses, sets standards for truthfulness in advertising, and evaluates the trustworthiness of businesses and charities, providing a score from A+ (highest) to F (lowest).
  • Financial Counseling Association of America Financial Counseling Association of America
    MMI is a proud member of the Financial Counseling Association of America (FCAA), a national association representing financial counseling companies that provide consumer credit counseling, housing counseling, student loan counseling, bankruptcy counseling, debt management, and various financial education services.
  • Trustpilot Trustpilot
    MMI is rated as “Excellent” (4.9/5) by reviewers on Trustpilot, a global, online consumer review platform dedicated to openness and transparency. Since 2007, Trustpilot has received over 116 million customer reviews for nearly 500,000 different websites and businesses. See what others are saying about the work we do.
  • Department of Housing and Urban Development - Equal Housing Opportunity Department of Housing and Urban Development
    MMI is certified by the U.S. Department of Housing and Urban Development (HUD) to provide consumer housing counseling. The mission of HUD is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD provides support services directly and through approved, local agencies like MMI.
  • Council on Accreditation Council On Accreditation
    MMI is proudly accredited by the Council on Accreditation (COA), an international, independent, nonprofit, human service accrediting organization. COA’s thorough, peer-reviewed accreditation process is designed to ensure that organizations like MMI are providing the highest standard of service and support for clients and employees alike.
  • National Foundation for Credit Counseling National Foundation for Credit Counseling
    MMI is a longstanding member of the National Foundation for Credit Counseling® (NFCC®), the nation’s largest nonprofit financial counseling organization. Founded in 1951, the NFCC’s mission is to promote financially responsible behavior and help member organizations like MMI deliver the highest-quality financial education and counseling services.