Thursday, July 23, 2009

How Fast Can You Adjust?

A while back, I posted "Do You Have a Crisis Plan," asking what you would do if you were laid off or had some other sort of financial crisis. But sometimes the question is not just "what will you give up," but "how quickly will you give things up."

An example drawn from real life: a couple in which the husband has just lost his job. The wife is a stay at home mom. They have a lot of home equity, and pretty good savings due to an inheritance, but they have a pretty expensive lifestyle. They also have a few significant one-time expenses planned for later this year: a vacation and a bat mitzvah.

Their savings might last a couple of years if they stay in their current home and make some cutbacks, like taking the kids out of private school. They could also refinance their mortgage to lower their monthly costs a bit, though that could be problematic if no one has a job. They could sell their house and move to a much smaller place with lower maintenance costs. They could cancel the vacation and scale back the bat mitzvah, but they don't want to, for the sake of the kids, and probably, to some extent, keeping up appearances.

The question about these changes is, how much? How fast? People often talk about having a 6-month emergency fund, or a 1-year emergency fund, but what if that isn't long enough? In this particular situation, and in this economy in general, I'd be extremely worried that it could take a very, very long time for the husband to find another job, and it may not be for anything near his previous salary level. If they just coast along trying to economize in minor ways, they could end up in big trouble. But if they were able to sell their house quickly, they'd free up a lot of cash that could significantly extend the time they can survive without anyone working.

Losing a job is a traumatic thing. People are scared and angry. They might feel a lot of self-doubt and shame. They want to put a good face on things, for themselves and for their kids, but also for the world around them: they don't want to admit they're in trouble. Each person's situation will be different, but I think it's important to take a hard, realistic look at your savings and budget and your prospects for getting another job, and then plan for the worst. I don't mean to downplay the significance of a family having to sell their home and turn their lives upside down-- it's not the sort of thing you should or can do at the drop of a hat. But sometimes you just have to act sooner rather than later.

Back to my crisis plan: if I lost my job today, I'd probably give myself a week or two before I tried to find a short-term roommate, given that back-to-school timing would be key-- at another time of year, I might let myself wait a little longer. I would immediately be emailing everyone I'd ever worked with to try to network my way into a new job or at least some consulting work, and based on some connections I have, I think I'd have a pretty good chance at getting at least some part-time income based on that. I'd also be keeping an eye out for any other job I thought I could do. If I saw a retail store with a "we're hiring" sign, I'd apply, even if the money was far less than my current income. I'd probably take the first job I could get, and just keep looking for a better one. If I was unemployed for more than a couple of months, I'd also probably be talking about moving in with Sweetie and renting out my entire apartment. I'd rather make short-term sacrifices right away than have to make more drastic sacrifices after running out of money later. We'll see if the family I mentioned above make the same choice.


Anonymous said...

It doesn't sound like you figure unemployment into your emergency plan which makes the scenario that much more stressful!

I could pay my bills on my state's unemployment compensation, and could live off of my savings for food and necessities for at least six months. I'm pretty employable but would probably have to move, so that would likely add some expenses to the situation.

However I am working on boosting those savings some more, because it would be tight!

Ashie said...

The move into retail is a scary one. Would you (or any other commentors) really take up a shop assistant position where you could potentially run into acquaintances, former coworkers, etc? Wouldn't that be difficult? How would you deal with it? It's easy to think certain things will be ok when they're far off, but when the reality is that you might have to serve your ex-boss tomorrow, wouldn't that make you, i don't know, think differently about retail as just another job?
I know it's easy to dismiss keeping up appearances (especially since I'm one of the people who doesn't take flashy holidays, etc anyway) but I'm sure it really does impact the quality of life of some people. (Whom I'm sadly usually judgemental about)

S. B. said...

Your post has a great slant on the issue of negative events. I'm amazed at many stories I read in the newspapers and the blogosphere where someone loses their job and then the same lifestyle continues for 2 or 3 years and then there is a crisis.

I really don't understand this behavior, as many times it seems like the people involved have substantial expenses that could be reined in. Last summer, our family substantially overshot our vacation budget and then we unexpectedly encountered some fairly large roof repairs. This was not even close to a "crisis", but yet we managed to almost immediately pull back expenses in many other areas... just to meet savings goals! So I confess that I don't really understand the attitude where one waits so long to adjust.

I completely agree..."how fast can you adjust" is a very important factor.

Anonymous said...

I lost my job recently. I knew it was a possibility and had prepared a budget for the eventuality. The plan was to move to a much cheaper place (we rent), significantly reduce eating out and cut back on all but essential shopping.

Well...several months have gone by since and I found it much harder to cut back than I expected. I was getting severance for a while so I justified it as a 'transition period'. And we did cut back on housing and shopping, just not as much as planned. But I did find cutting back on eating out much harder, because it's hard to socialize with friends without eating out, and because of appearances too: I hate having to say 'oh let's go to a cheaper place'.

My spouse does work so we're in a better position than the couple in the example, but I just want to say I know first hand the denial, pride and the apathy that goes into these bad decisions.

markyming said...

I've cut back all my life! I work freelance. My expenses are usually 20 to 40% of my income. This month, I'm probably earning only 20% of my usual income. So, that means no savings, but no real change in life style. If I needed to cut back, I'd cut back in areas where I'm the only one affected. Wouldn't really want to affect friends. I'd still go to restaurants, but I'd take the bus there. I guess shopping would be an area I could totally cut back on.

frugal zeitgeist said...

I have a pretty robust emergency fund, so my game plan would be to cut my expenses to the bone (with the exception of traveling to see family; that's non-negotiable) and take a year off. I'm good for a year and a half on savings alone, but unemployment and severance would probably stretch that out for another year.

Great question, as always.

Anonymous said...

I've prepared a budget that cuts all expenses to the bare minimum and calculated how long I could last with the EF I have. I'm really grateful to bloggers/pf writers like yourself who had warned people to put together a plan "just in case" of that job loss. Putting together the plan has helped ease some of the anxiety of possibly losing my job. More and more people I know are losing their job or having salaries cut. Everyone should have a plan in place!