Adjusting the Budget for Job Loss, Planned or Unplanned

Do I need to find another part-time job?

Job loss was one of the biggest realized fears that crept in after the COVID-19 shut-downs in March of 2020. Many people were forced to adjust their lives and their budgets due to being furloughed or laid off with short notice. Thankfully, along with the loss of those jobs came higher and extended unemployment benefits, economic stimulus packages, relief from eviction or foreclosure, and fewer opportunities to spend money. Who knew that after mass lay-offs around the country that now, a year later, there’d be a shortage of labor, not jobs! A large percentage of the workforce learned how to adjust to one income or a lower income and have now chosen to be unemployed, with or without the government benefits.

In my situation, the business my mother and I started about 15 years ago managed to stay afloat through the pandemic, but the effects it’s had long-term on both of us, as well as our client caseload, may lead our business down a path of never fully recovering. We are considering closing our family therapy practice for good. This is a combination of forced and chosen job loss, for which I now have to adjust our family budget.

Over the many years, I’ve slowly reduced the number of hours I put into the business and also the amount of my pay. I have a very flexible schedule and work exclusively from home, which has been such a blessing at the current stage of my family. I still have two preschoolers at home with me three days per week and two older children with very busy extracurricular schedules. The paycheck has been smaller than when our business was at its prime and our caseload was overflowing, but the extra money has been essential to getting us ahead in our journey toward FI. We’ve been able to contribute the full amount of my part-time income to investing and charitable giving, while meeting all of our living expenses with my husband’s salary. Now, we will have to make cuts as my mother and I move closer to closing the doors to our practice for good.

My total take-home pay is currently $1,910 per month. $1,700 of that goes toward my ROTH contribution (averaging out to $500/month but invested as a lump sum at the beginning of the year) as well as my husband’s and my combined contribution to our joint brokerage account ($1,200 automatically invested into VTSAX monthly). The other $210 is set aside to make charitable contributions of our choice each month. This giving is in addition to tithing.

The last thing I want to do is cut out our investing or our giving when I lose that monthly income. Whether we’re a one-income or two-income household, we still plan to hit FIRE by 50 (or hopefully sooner). Continuing our current rate of investing is essential to meeting that goal. So, I now have to make some tough decisions about where to reduce our spending or whether to take on more work to replace that income.

I can also take into consideration the cash flow we are receiving from our rental properties, if that’s where the money is best served right now. However, we’d ideally like to put all our cash flow this year toward reserve funds or future real estate investing.

So, I decided to dedicate a slow, rainy, unseasonable cold morning at home to analyze our current expenses and determine where I can “find” as much of that $1,910 per month in our budget. There is a strong possibility that my final paycheck will come in June, so we will need a total of $11,460 for the last 6 months of the year to make up for the loss. That’s a big chunk of change!

Our annual budget was my first place to look. I discovered that I had budgeted some overages in our savings categories above the contributions mentioned above. Because we already have a 12-month emergency fund, plus money set aside to buy our next two vehicles in cash, I decided to re-allocate the $1,000/month going into our online savings account. That adds up to $6,000 over the 6 months that I’d be without my part-time income.

Then, I reviewed what I had budgeted for a new life insurance policy this year and what we actually spent. After reading about life insurance options, listening to a couple podcasts on the topic, and doing some comparison shopping, we were able to secure a term life policy for my husband for much less than we had budgeted. We had $860 set aside for that new policy (as a supplement to the one offered through his W-2 job), but we only spent $380 and paid in full. Therefore, we had a surplus of $480 in that category. Additionally, we’ve already pre-paid for all of the kids’ summer activities and camps, as well as the registration fee and August tuition for our preschooler, leaving us with no child care costs for the summer. We will not have to pay the $749 monthly preschool tuition for three months, and we can remove the $300/month we’ve been budgeting for kids’ activities and camps. That leaves us with another $3,147. A few additional cuts include a decrease in cell service fees for a savings of $100/month by switching to Mint Mobile; cancellation of Camp Gladiator membership for a savings of $79/month; and cancellation of private horn lessons now that our eldest daughter will be receiving additional band instruction each day at her public high school for a savings of $100/month. These three changes add up to $1,674.

Also, I’ve resolved to going back to at-home haircuts for all the males in my household, which amounts to a savings of $85/month. That will provide us an extra $510 through the end of 2021.

The total amount “found” in our annual and monthly budgets to make up for the loss of $11,460 in income is $11,811!! I was able to complete this analysis in less than half an hour using the detailed spreadsheets I keep for our family’s income and expenses. With the conclusions drawn, it will not be necessary for me to find other part-time work to replace my lost income for the second half of the year! We can continue making substantial progress toward our FI goals without sacrificing what’s important to our family or seeking additional sources of income.

Many people fear that having detailed budgets and tracking expenses will limit their spending and, therefore, their happiness. However, I find that these practices provide the opposite: freedom! And for me, freedom with my time (and my family’s time) is the ultimate goal of pursuing financial independence.

If you find yourself in a similar position, either preparing to leave your current job or fearing that you might lose yours at any moment, I definitely suggest tracking every dollar you spend, if you haven’t started doing that already. Once you have a framework, finding places to make cuts is pretty easy.

If you’re already a great budgeter, think of your income loss as a total dollar amount through the end of the year instead of what you need to cut or save each month. Recognizing that there are annual expenses/allocations that might be easier to cut than your monthly ones might give you a little room to breathe (and spend) when the expected or unexpected happens.

For more specific ideas on where to make big cuts, check out 9 Ways to Save this year.

Start a New Monthly Budget

Financial Freedom in 2021! Take Action: Day 5

After completing your annual budget yesterday, you should have an amount remaining between your net income and your fixed/priority expenses. If there is not a livable amount (for the year) leftover, some of those priorities may have to have deadlines that extend into later years or may need to be removed temporarily.

In the example shown yesterday, there was $20,420 remaining for monthly spending. That comes out to approximately $1,700/month, which may seem minimal if you are raising a family. However, keep in mind that this does not include major living and transportation expenses, monthly savings, investment contributions, or amounts budgeted for other top priorities. Therefore, the amount *leftover* is for variable expenses of food, gas, utilities, entertainment, electronics, clothing, gifts, and extracurriculars. It may still present a challenge, but that’s what we’re here for, right?

You can use the same “Personal Budget” spreadsheet or any budgeting app to set up your monthly budget with the amount you’ve calculated from your annual budget cash balance. Divide the total by 12 and set that as your “income” for the month in your budget. Then, estimate how much you will spend in each of the categories listed in the paragraph above. Practice zero-based budgeting to the best of your abilities.

After establishing your monthly budget, plan to track your spending via your bank app or receipts and then give yourself some grace. It may take a few months to get the estimates correct, and you may encounter some setbacks. The good news is that setbacks don’t actually set you back financially if you’ve been saving for emergencies and if you are committed to getting on track the following month. Once you have a system for monthly budgeting, you can become an expert in a matter of a few months, and this process will take less and less time.

One thing we try to do with regards to monthly budgeting is to start the following month indebted to the previous one IF we over-spent in variable spending categories, but we also pay ourselves the surplus (in the next month’s planning) if we come in under-budget for a month.

This budgeting process has become a fun ritual for my husband and me because we turn our discussions into monthly money dates! It can actually be fun. 😉

Create an Annual Budget

Financial Freedom in 2021! Take Action: Day 4

This step is less intimidating than it sounds, but it does require knowledge of your fixed expenses and your list of priorities with their totals from yesterday’s post. This budget can be in any format that you’re comfortable with: a spreadsheet, an app, a sheet of paper. I prefer the “Personal Budget” template in Microsoft Excel; it’s formatted for a monthly budget but can be altered to enter amounts for annual income and expenses. I’ve also added a column for “Actual” expenses on my spreadsheet, in addition to “Budgeted”, so I can track our exact spending in each category. I’m sure there are *smarter* ways to keep track of everything, but Excel spreadsheets work for me, so I’m sticking with them. All you really need is a format that allows you to list your annual expenses and subtract those from your net income.

When making this list of annual expenses, think of those that are fixed and can be predicted for the year. Some of these expenses include mortgage or rent payments, property tax estimates, home owner’s insurance, car insurance, other insurances, a regular medical expense such as contacts or prescriptions drugs, car payments, annual subscriptions such as Costco or Amazon Prime, and tithing. After recording those fixed expenses, add lines for your priorities, such as an emergency fund, monthly investing, travel plans, and/or a big purchase. I like to include these in our annual budget so that when I’m preparing our monthly budgets, I use what’s leftover to plan our variable spending. I want the fixed expenses and our savings priorities set aside before we even begin our monthly spending on groceries, experiences, gas, clothing, etc.

Below is an example of what an annual budget might look like. The “Cash Balance” remaining is what will be used for monthly budgeting tomorrow.