How would you handle a loss of income?

The local free paper in town recently did a story on the local homeless population, interviewing a few of them and getting their own individual stories rather than treating them as one faceless mass. Today, I was reading the letters to the editor in the actual paper, and surveyed the usual gamut of reactions, ranging from “we need to do more to help these people” to “those leeches on society need to be run out of town on a rail.”

Usually, I’d just remind myself to never read the comments, except it was one of them, the pithiest of the bunch, that made me think. “Many, many people are a paycheck away from homelessness. We could end up in their shoes tomorrow.”

This sort of thing plays right into my own anxieties, of course, but the implied question is one well worth asking.

Asking the difficult questions

What would happen if you lost your income? What would you do?

Obviously, you would look for another job, but in the meantime, life will need to go on. How will you pay for it?

You can cut your expense down to bare minimum, but there’s a limit to that. You may not go out to restaurants anymore, but you still need to buy food. And rent still comes due the first of the month. Your monthly bills still come due (spoiler!) monthly.

What about savings. Do you have any? If your income went to zero tomorrow, and you were forced to live on your savings how long would it last? A few months? A few weeks? What would happen after that? Credit cards? What’s the plan?

If you’re like me, this sort of thinking sends chills up my spine. Does this worry you too? (If not, how in the world not?)

I don’t wish unemployment on anyone. Not only is the misfortune financial in nature, but there’s also a psychological component that can be debilitating. Nevertheless, it happens, so what can you do?

This one’s simple

One single point: get an emergency fund. This is not float, this is not retirement, this is not credit cards, this is money you sock away in some account somewhere that’s available when you really need it. I believe really strongly in having as much as possible, three months minimum, optimally six months, maybe even more. This is what you need to live.

Wondering where in the world you are going to get all that money from? (We are talking thousands of dollars here, after all.) Glad you asked. While I wish I could personally take care of that for you, here are a few things you can do that will put you on the right track.

• Create a money sign-out sheet. It’s like finding free money behind the couch!
• Cut down your bills or expenses. Yeah yeah, we all know we should live cheaper and cut out all those monthly gadget charges. But it’s also true.
• Eliminate debt. Get this: if you owe $500 a month in debt payments, and then you pay the debt off, you now have $500 extra dollars each month! Now that’s fun.

Which way?

The idea of eliminating debt and building up an emergency fund seem to be at cross-purposes, because money that goes to one can’t go to the other. In general, I like the rule of starting a small emergency fund, then knocking out the debt, and then using the extra money to build up a big cash reserve. While the specifics can depend on your situation, just know that it doesn’t really make sense to have a $10,000 emergency fund when you have $10,000 in debt though.

Breathe easier

The best part about the emergency fund has nothing to do with the money. It has to do with the peace of mind. I wish I could convey how much I was able to relax once I realized that I could handle a months-long job loss without going into debt or wondering how I was going to pay my bills. It was a physical sensation, like the cliché of the “huge weight lifted.” Yeah, exactly like that. My anxiety level, which I hadn’t realized was particularly high, dropped by a significant margin. I had a cushion. I had a buffer. I was going to be okay. I could feel it.

I want you to feel this. It’s worth the effort.

Now, even a year’s worth of emergency fund won’t help you after the year is up (though that period of time might be a good space to take control of your income), but it will help you freak out a little less, which will help you to make better choices. No, I don’t really think we’re all that close to being homeless. Most of us are fortunate to have a support network of friends and family. We have options, and that’s good. But let’s not take anything for granted. It’s going to work out for us, but only if we ourselves make it so. Let’s make it so.

But enough about me. Do you have an emergency fund? How does it make you feel?