Plan Your Spending
Five key strategies with dozens of suggestions for dealing with reduced income.
-J.D. RockefellerIncome reduction is often an unexpected event and its causes are numerous: job loss, illness, accident, divorce, natural disaster, and so on. Therefore, it is important to plan for it through budgeting, and insurance. When it does happen, however, there are additional survival strategies you can use.
Short or Long Term?
It’s up to you to determine which of the following strategies will be appropriate for your situation. If you believe the income reduction is short term, you can be less aggressive or more selective about which suggestions to use.
Yes, you may want to take five minutes to calm yourself if you’re feeling anxious, but afterwards here are five strategies you can take and use to address the income reduction.
1. Be Proactive
If you ignore bills or past due notices, the situation can quickly go from bad to worse. Creditors can charge late fees and high interest rates, which can cause the debt to grow rapidly. They can also shut off your service, even if it’s a vital utility. In a short time, you could be facing eviction or foreclosure, collection agencies, and/or lawsuits.
Therefore, contact your creditor as soon as you know you will not beable to make the payment on time. Use the following strategies to create a plan, set priorities, and then communicate your plans to your creditors (preferably in writing, so you have a record of your communication). Ask creditors of vital utilities – heat, power,water, phone – if they have any temporary assistance programs. When you call your creditors to ask about hardship programs or other arrangements, ask to speak with a manager or supervisor (you need to speak with someone who has the authority to say “yes”). Finally, even if the creditor won’t agree to a reduced payment, it won’t hurt to send the most you can afford along with a letter of explanation and it may help to show your good faith effort. Remember to keep records of all verbal or written correspondence.
2. Plan Your Spending
A smaller pie is going to require more careful slicing. You’re going to need to revise/create a Spending Plan (budget) that will address your financial problems, anticipate your needs, and allow youto live within your means. For assistance with this, read our education publication entitled The Spending Plan.
A critical part of preparing your spending plan will be to prioritize your debts. A simple method is to divide your financial obligations into three levels:
- Priority 1 – mortgage or rent, auto loan, vital utilities, legal obligations (child support, alimony, taxes);
- Priority 2 – secured debt (such as loans for secondary property/vehicles);
- Priority 3 – unsecured debt (such as credit cards and medical bills).
In its Guide To Surving Debt, The National Consumer Law Center offers the following “Sixteen Rules About Which Debts To Pay First:”
- Always Pay Family Necessities First [food and necessary medicines].
- Next Pay Your Housing-Related Bills [mortgage, rent, taxes, required insurance]
- Pay The Minimum Required To Keep Essential Utility Service [heat, power, water]
- Pay Car Loans or Leases Next If You Need To Keep Your Car [for work (including required taxes and insurance)].
- You Must Pay Child Support Debts
- Income Tax Debts Are Also High Priority
- Loans Without Collateral Are Low Priority [unsecured]
- Loans With Only Household Good As Collateral Are Also Low Priority
- Do Not Move A Debt Up In Priority Because The Creditor Threatens Suit
- Do Not Pay When You Have Good Legal Defenses To Repayment [such as goods were defective]
- Court Judgments Against You Move Up In Priority, But Often Less Than You Think
- Student Loans Are Medium-Priority Debts
- Debt Collection Efforts Should Never Move Up A Debt’s Priority
- Threats To Ruin Your Credit Record Should Never Move Up A Debt’s Priority.
- Cosigned Debts Should Be Treated Like Your Other Debts.
- Refinancing Is Rarely The Answer.
3. Lower Your Expenses
- Shop with a list and a calculator (make lists after you create a Spending Plan).
- Determine the best value: disregard brand name andcompare the cost, quality, durability, energy efficiency and usefulness. For assistance, check out reviews from consumer organizations (such as Consumer Reports), or user posts online (such as Amazon.com, Epinions.com).
- Determine best venues: Once you have decided on which items, consider the following ways to get them for less:
- Bulk, Discount, and Warehouse clubs.
- E-Shopping. There are plenty of major online stores (such as Amazon.com, SmartBargains.com, Overstock.com, Half.com,Buy.com, Ebay.com) where you can purchase many products and servicesfor less than at a brick-and-mortar store. Interstate commerce is sometimes not subject to sales tax. Many online stores offer free shipping (which saves you time and gasoline). Remember to practice safety when shopping online (check site security, use virus protection,firewall, etc.). Mail order companies might give you similar types of benefits.
- Pre-owned (used). Great deals can be found at thrift stores, garage sales, etc.
- Borrow instead of buy. Friends, neighbors, or your public library may have things you only need temporarily.
- The Consumer’s Union recommends you skip the extended warranty. These add-ons raise the product price and provide huge profits, but in reality fewer than 20% of these products will be brought in for repair.
- For ways to lower Holiday spending, see our publication “Holiday $urvival Guide.”
- Avoid credit. The average person will spend less ifthey have to physically hand over cash for a purchase. If you must use plastic, using a debit card will keep you from spending money you don’t have. If you must use a credit card (for example, tolimit your liability for online purchases), you should have the funds now, so that you will be able to pay the entire balance on the next statement. Finally, stay away from check advance or “payday”loans as they charge outrageous fees.
- Perform maintenance on items so they will lastlonger. Using an item in this way (until it wears out) can reduce its overall cost to you and to the environment.
- Consider doing it yourself, but carefully weigh the pros and cons (including risk).
Housing & Transportation
- Contact creditors for temporary assistance. If you have a good payment history, they might be willing to defer one or two payments.
- Investigate refinancing your home to get a lower payment (factor in closing costs).
- Downsize. If your situation looks long-term, weigh the costs of trading down for a house/vehicle with a lower payment.
- Consider getting a roommate or a boarder.
- Consider car-pooling or public transportation.
- Re-evaluate insurance needs. Consider raising deductibles and eliminating unnecessary coverage.
- Compare prices on items you use, then stock up during sales.
- Use generic or store brands and buy your non-perishable items in bulk.
- Use coupons for products that you use regularly. Coupons can be found online at sites, such as www.currentcodes.com or www.momsview.com.
- Prepare meals in bulk and freeze portions.
- Eat at home; pack lunches; skip the lattes.
- For more ideas visit: www.GrocerySavingTips.com
- Close or reduce unnecessary utilities (cable, cell phones, etc).
- Practice conservation. Use a programmable thermostat to reduce heating/AC while you sleep and are at work. The U.S. Department of Energy has an online do-it-yourself home energy audit and many energy saving tips: www.eere.energy.gov/consumer/. For more ideas, contact your local utility companies.
- Check the competition at places such a www.LowerMyBills.com.
Recreation & Entertainment
- Enjoy more free things. Parks, concerts, plays, festivals or other attractions can be free. For state attractions, stop in at a state welcome center or go online to www.state.xx.us. Call or stop in at the local visitor’s center. Remember that the best thing you can give your family and friends is your time.
- Public libraries have CDs and DVDs.
- Make vacation arrangements early and in off-peaktimes. The Bankrate link below has 28 ways to lower your costs on vacation.
- Cut out/back tobacco and alcohol.
4. Raise Your Income
- Sell items that are not needed. Household items, equipment, clothing, second vehicle, etc., can be sold through venues such as garage sales, community bulletin boards, local papers or internet classified/auction sites, or local consignment shops.
- Consider tapping into savings or retirementfunds. Temporarily stop or reduce contributions to retirement plans; before withdrawing funds, weigh the cost of any fees or penalties.
- Obtain Additional Employment Income. Consider asking for a raise if you think you can show merit, or ask for additional hours or a pay advance; get an additional job, or possibly a new job that pays more.
- Consider using the equity in your home. Carefully weigh the costs and risks involved in refinancing (to cashout equity) or in getting a home equity loan.
- Investigate your tax withholding. Consider adjusting your W-4 withholding to avoid having a large refund; or if your situation looks long-term and your income is well under $38,000 see if can qualify for the Earned Income Tax Credit (click on the EITCAssistant link at www.irs.gov or call 1-800-829-1040).
5. Seek Assistance
- Government services. A great deal of education and information is available regarding food programs, medical and welfare programs, employment assistance, and more. For helpfinding Federal programs, visit www.firstgov.org (or call1-800-333-4636). For help finding local services, call 311 forcity/county agencies and 211 for social services (in most states).
- Local charities and faith-based organizations. For help finding local charities, check the yellowpages or visit www.lic.org. If you belong to a faith community, speak with the pastor/leader. If they don’t have charitable assistance for you, they may encourage you to temporarily lower or suspend your contributions.
- Friends and relatives. Everyone needs help at times. Talking with the people who care about you can provide important emotional support. Additionally, they may offer some other form of assistance. A private loan (for example) can be a win-win, but be sure to put the terms in writing.
- Non-profit accredited credit counseling. A qualified credit counselor can help you to know your rights and your options with all these strategies.
The Best Things In Life
Paradoxically, hard times can have some positive effects: they can provide an opportunity to renew your appreciation for the things that are more important than money: your religious beliefs/spirituality, your family, your friends, your health, your talents and abilities, your environment, your freedom.
To Find Out More
- The Spending Plan (Alliance): www.knowdebt.org/education.php.
- Guide To Surviving Debt (D. Loonin, et al, National Consumer Law Center)
- 331 Ways To Cut Costs (Bankrate): www.bankrate.com/brm/news/cheap/331ways/331home.asp.
- The Complete Tightwad Gazette (A. Dacyczyn, Villard Books)
© 2006 Alliance Credit Counseling.