Creating Financial Safety: A Guide to Preparing for Income Loss and Achieving Peace of Mind
In my coaching, I spend a lot of time focusing on expenses. But, feeling financial safe requires a focus on both sides of the personal finance equation: income and expenses.
When I think about what makes me feel financially secure, I think about knowing we’ll have income to cover our expenses. On the income side, I feel safest knowing that every month our income is greater than our expenses, we have savings in place if there is a loss of income, and we have a plan to make additional income if we were to lose our primary source of income. On the expense side, I feel safest when I am deeply familiar with our budget, I know we’re spending aligned with it, and I know where we would make changes in our budget if we needed or wanted to.
We generally can control our expenses, but what happens if we experience a loss of income? Income loss or change can happen for several reasons: lay-offs, termination, injury, theft, market factors, or unreliable income sources. Not having an income for any period of time can cause financial and emotional turmoil. The best time to prepare for an income loss is before it happens.
Here is what you can do to create financial safety and be prepared in the event of an income loss:
Know your expenses. Get really clear on what you spend every single month.
Know which expenses would get cut if you had a loss of income. In our budget, our “fun money”, “clothing”, “activities and entertainment” and “gifting” categories would be eliminated if we had a loss of income. Without income, we want to minimize damage and risk.
Have a savings account that would cover these core expenses for 3 to 6 months. Create a larger savings account if you feel risk averse, work for yourself, or worry about the ability to replace your income in the 3-6 month timeframe.
Know your sources of income well and objectively assess the reliability of each source.
Think, ahead of time, how you would cover your expenses. Assuming the loss of income was due to job loss, I like to think ahead of time about what kind of jobs we could do if we lost a job and needed income.
If you’re self-employed, consider disability insurance.
So much of the reason people worry about finances is because of the unknown and the feelings of insecurity. Knowing your numbers clearly and having a plan in place in case you encounter this scenario can give you the ability to weather the storm confidently.