Surviving an income reduction can be extremely difficult, particularly if it results from an unexpected event such as layoff, termination or reduced hours of employment. Other life changing circumstances such as health problems and divorce can lead to extended periods of reduced household income and subsequent budgeting difficulties.
How to Cope
The best way to survive these types of situations is to "expect the unexpected". In other words, have a plan and establish an emergency savings fund that you can draw from in your time of need.
How much to set aside in your emergency savings fund will vary depending on your income, monthly expenses, number of dependents and lifestyle. However, most experts suggest that it should be enough to cover at least three to six months of living expenses — though some recommend as much as nine months. This ensures you can afford the essentials, such as rent or mortgage payments, property taxes, groceries, insurance and utilities while you seek a more permanent solution.
Another proactive strategy is to keep an eye on your total debt servicing (TDS) ratio. This indicates how much of your gross (before-tax) income is already committed to your monthly debt obligations, such as credit cards, lines of credit, vehicle loans, and housing costs. You can calculate your TDS by dividing your monthly debt costs (e.g. $920.00) by your gross monthly income (e.g. $3,000) and multiplying by 100 (31%).
Though the ratio will ideally be as low as possible, anything less than 40% typically means that you have an acceptable level of debt. Proactively managing your debt and reducing these obligations in good times will make surviving a period of income reduction that much easier.
If you haven't been able to establish an emergency fund, or need to stretch those funds as far as possible, consider some of the following strategies:
Review your budget: Where could you reduce your expenses to better reflect your current circumstances?
Increase your income: Could you take on additional part-time or casual work to supplement your earnings?
Downsize your possessions: What could you sell at a garage sale or online to provide an immediate cash injection?
Pursue financial assistance programs: Do any of your utility providers offer subsidized or reduced cost options for low-income earners?
Note: Many utility service providers across Canada offer equal payment plans or similar rate controls to help qualifying members to avoid seasonal fluctuations
Subsidize your housing costs: Could you take on a temporary roommate or boarder to offset your rent or mortgage?
Reduce your monthly debt obligations: Could you negotiate with your lenders for lower payments, a reduced interest rate or partial debt forgiveness?
Free Confidential Consultation
If your biggest struggle in dealing with an unexpected income reduction is keeping up with debt payments, an MNP Licensed Insolvency Trustee may be able to help. During a Free Confidential Consultation, we will review your financial situation and discuss your options.
If you qualify for a Life-Changing Debt Solution such as bankruptcy or a Consumer Proposal, your Trustee will help you understand the pros and cons of each and decide what's right for you. No matter how much you earn, a financial fresh start is within reach. We can help you defeat your debt for good.
CIRP, LIT
Senior Vice President
Servicing: Brandon, Killarney, Portage la Prairie, Neepawa, Virden, Souris, Deloraine
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