RichardContents
A few years ago I launched a small business (“side hustle”) that quickly took on a life of it’s own. Within weeks my business was generating twice the income of my full-time job – and struggling to find enough time in the day to do both.
After some careful thought – and with an emergency fund in place – I opted to quit the secure yet hellish job I was working and instead focus on my business.
All went well for a while as I focused on doing something I loved and watched as the money kept rolling in. But as they say, all good things must come to an end and while I won’t bore you with the details the business eventually went up in smoke. And with it, my income.
To say I was concerned about my immediate financial future was an understatement. More than a few nights sleep were lost over the problem.
You know the old classics about “living within your means” and not letting lifestyle inflation swallow any salary increases but here’s another question for you to consider…
What if your income dropped significantly – or even stopped altogether – tomorrow and without any warning. How would you cope? What downsizing tips can you employ to rapidly reduce your expenses?
Hopefully if you’ve been squirrelling money away you’d have some kind of “emergency fund” saved up that you could call upon to relieve some of the short-term pressure, but what if the problem was likely to be longer term?
What if you got sick, or had to take care of an elderly relative, or your business went bust or you were made redundant?
Certainly there’s a good chance you could recover (eventually) but most personal finance experts seem to recommend an emergency fund that covers 3-6 months of living expenses. What happens after that in these extreme circumstances?
You see, even if you’re living within your means, and intelligently managing to increase your savings every month, one of the most important downsizing tips that few of us consider is how quickly we could reduce our living expenses if we had to.
Consider for a moment all the financial obligations that many of us take on.
A mortgage or rental agreement, minimum payments on credit cards, utility bills, cell phone contracts, gym memberships and so on.
Certainly in lean times you could eat out less, buy cheaper foods, drive less and so on – but what about all these financial obligations that you just have to meet for contractual reasons every month no matter what? These obligations are what can really burn you if you’re not careful.
Struggling to pay off debt? There is an easier way…
For example, just imagine that you’re half way through a 12 month cell phone contract that costs you $50 a month. If a financial emergency arose, could you downsize or eliminate this cost with immediate effect? Probably not. You’re stuck with it, like it or not. And this same principle may apply to all manner of monthly costs that you’ve been inadvertently stacking up, one on-top of another, for years on end.
The simple fact is that to retain control of your finances in these “extreme” events it’s important to have a ready-made plan in place so that you can downsize your finances as quickly as possible.
After all, if you can halve your outgoings at any moment then if necessary your six month emergency fund instantly covers you for a year. Alternatively even flipping burgers at McDonalds will go a decent way towards covering all your radically-reduced new living expenses.
Downsizing Tips: How To Rapidly Cut Your Expenses
With that rather worrying (but none-the-less important) realization in mind, here are some simple steps you can consider. Think of them as “insurance” against a sudden and potentially-prolonged drop in income. And while I hope you’ll never need them, if and when the time comes, you’ll be glad you’d prepared yourself for just such an occasion…
Cut Your Expenses Before The Emergency Occurs
Ensure at least a portion of your savings are freely available to you at a moments notice rather than being tied up for the long term. This way, if you need to dip into your savings you won’t have to wait weeks to access the funds that’ll keep your head above water.
Don’t Upgrade Your Cell Phone
Any form of contract that requires monthly payments limits your ability to rapidly downsize your spending. Whilst contract phones generally offer far better value for money than prepay phones, they can put you at a disadvantage if you need to cut costs quickly.
There are a number of ways you can mitigate this risk though. Firstly, you can look at monthly rolling contracts that don’t tie you in for a long term. Or you can take the option I’ve chosen which is essentially not to upgrade my phone when my contract reached it’s end.
This has two real benefits. Firstly, as I’m out of “commitment” I can end the contract at any time without penalties only needing to give 30 days notice. Secondly, if and when I ever damage/break my phone (which is a very rare occurrence for me) I can always then opt to upgrade and hence get a “free” phone.
Of course the only real downside to not upgrading is that you’ll need to stick with your current handset for a while, but given the potential upsides I think it’s a compromise worth making.
Prepay Whenever Possible
There are a range of bills that can either be paid one one lump sum or spread out into monthly installments. Two perfect examples are computer backup services and car insurance.
Generally, by prepaying for a set period of time you’ll not only get a discount but you also won’t have to worry about making that payment every month in the future if your financial circumstances change considerably.
Look For Shorter Or Rolling Contracts
I’ve been considering joining my local gym, but I hate being tied into lengthy contracts. This is especially so for gyms, where so many people flake out after a few weeks and end up paying for the rest of the year even if they never step foot in the gym.
However I was interested to note recently that one of my local gyms has addressed this and now offers contracts of only 3 months in length rather than the standard 12. The cost may be slightly higher but my financial obligations – and hence risk – will be far less.
So whenever a contract is involved that requires regular monthly payments like clockwork, try finding out whether they, or any of their competitors, offer shorter or rolling contracts that puts you at far less risk.
Investigate Income Protection Insurance
Income protection insurance is another way to reduce the risk of a sudden drop in your income. While you’ll pay for the privilege, this form of insurance can help to ease any worries you may experience and make it far easier to get back on your feet afterwards.
Pay Off Your Debts
Most debts require regular payments, no matter how small they might be. Whether that’s a loan, credit card, mortgage or car payment, the more of your debt you can pay off the less your monthly financial obligations will be.
So cut your spending and instead invest your extra capital into finally paying off those debts that have been hanging over your head for so long. Best of all, making that final payment on any sizable debt is simply the best feeling in the world!
Update Your Resume
There’s nothing worse than losing your job and having to start your job search from scratch. From creating a resume to printing it out, locating possible jobs to apply for, getting your suit ready for interview and more there can be a lot of steps between needing a new job and actually landing one.
I think it’s smart therefore to constantly update your resume so it’s ready for action whenever you need it. No messing around trying to find an old copy or remembering what your exam grades were from a decade ago. No, keep a copy of your resume on your computer and update it every six months or so.
That way, if you ever do need to apply for a new/additional job with very little notice, you won’t have the waste hours or even days trying to create a resume to send out.
Start A Side Hustle
Starting your own small business – whether you clean windows on the weekend or start a blog in your evenings – can be another handy way to mitigate any sudden drops in income.
By slowly attracting customers and figuring out how the business works best you’ll have not only an additional side income to enjoy/save but you may well be able to ramp up this income opportunity rapidly if ever it’s needed.
Ask For Credit Before You Need It
Lastly while I hope the previous points, when combined with your emergency fund, will ease the pain of any sudden drop in income, remember that lenders are far less willing to offer credit to those with low incomes or no income at all.
Therefore, assuming you’re going to use the credit smartly and save it for a rainy day, for some people – especially those without a sizeable emergency fund – it might make sense to apply for an overdraft or credit card now while the going is good. Then, should the worst happen, at least you’ll have a little extra leeway to help get yourself out of any short term shortfalls.
How have you insulated yourself from possible sudden drops in income? Please leave a comment below with your thoughts…
Great tips here. I especially liked the suggestion to cut expenses before the emergency occurs. It will help save money in the long run, and sometimes it can be hard to cut expenses after an emergency, especially if you have a contract or need immediate liquidity or something along those line.
I’ve been caught out a few times over the years when the “going was good” and I let my finances “free-wheel” for a while. Then suddenly when you have to reign it back in things can be far harder.
Be married. Keep critical expenses down to half your income. Preferably, have this include important savings as well. Done!
If our income got cut in half, we’d be fine indefinitely with just a little belt tightening. There wouldn’t be a ton of extra for a while or very much to put towards any goals, but we’d have money for all our ongoing expenses, a bit of “fun money” each, 10% 401k contributions and a few hundred a month in discretionary money.
In the mean time, we’re stashing cash and knocking out some big goals of ours.
Wow now that’s some solid advice Slinky! It must feel great to know you’re “covered” if something serious happened to your finances 🙂
Is anyone else here managing to hit a 50% savings rate? Personally I’m hitting around 40% – but with plans to increase that (keep your eyes peeled for a new post soon showing my plan of action).
And stay married.
Great suggestions! I’ve used a lot of those ideas and on top of emergency savings, I also have a mental list of things I’d cut if I had to. Things like Netflix, the frequency of dinners with friends, features on my phone bill, etc. I’m not excessive with these things by any means, but I could go into “preservation mode” if I had to.
[…] means most of the population is petrified of losing their job, but in cases where people are “downsized” it can lead to considerable financial […]
You would be surprised when you go from “want” mode to “need” mode how little money it takes to make it. I am getting ready to retire. This will be another adventure on living on a fixed income.
I have one child at an in state university and another in a private school because I just don’t trust the public middle school with him. 75% of his tuition has been paid with scholarship and donations but we still have a monthly payment. We have no car payment but we are currently paying off a $3000 dental bill and we have a few credit cards with a cumulative balance of around $1,200. I take my lunch to work every day and we never eat out or go to movies or events. We still barely keep our heads above water…but my husband smokes and spends close to $400 a month on cigarettes! Is there anything I can do? We could downsize out home to save 200-300 per month. But moving is expensive in itself. I feel so trapped and frustrated…Any advice? We both work full time and have health benefits through our employers.
I know as far as the smoking 1800quitnow is a good place to start, and i believe its free.
I can relate to the head just barely above water because we literally had the rug jerked out from beneath us and went from a $6500+ a month income to just over $2500 a month due to a contract buy out. We had a 60 day notice. You live your lives in a certain manner for 19 years and with one 5 sentence letter you have 60 days to sink or swim. Here we are a year later making it work. It’s not easy and some months are a little more of a struggle than others.
We had a lot of unnecessary debt. We had an extra vehicle, sold it! Used that money to pay off all our small debt and had a little left over to put aside for emergency. We cut everything as much as it could be cut and eliminated anything we didn’t need. Credit cards were cut up & paid off, all but one. Searched around and got better rates on home owners & auto insurance. Switched from monthly billing on sat tv to prepaid sat tv. Killed the internet off on the phones and reduced the monthly plans down the bare bones. Cut back on eating out. Coupon clipping & Grocery ad watching for the best deals. We left our auto loan alone because it will be paid off this fall but we reworked our mortgage and extended it out from 7yrs to 14yrs. Doing so cut our house payment by more than half and it meant we got to STAY in our home and keep our land which was very important to us. When the car is paid off, most of that extra cash will go toward monthly principal balance payments on the mortgage and in turn will reduce that extra 7yrs we had to add. Anything we had to do short of selling our kidneys we did it. (I’m joking about the kidneys) The belt is cinched tight right now, but we’re managing.
Another thing we started doing for extra income is selling on ebay. That’s extra money that comes in very handy. If you have a skill like sewing, crafting, crocheting, etc.. put it to use! Even if you have vintage collectible items you can sell. Just be smart and do your research.
I can understand how hard it is for someone to stop smoking because my Mother couldn’t put them down. If I’m at a point where I’m considering having to move out of my home to compensate the expense of a vice such as that, my husband and I would have to sit down and have a heart to heart. Even if the habit could be cut in half and slowly eliminated over time.. anything. Hang in there.. There is a light at the end of the tunnel..
Setting up an automatic transfer to a special savings account on payday is a great way to squirrel away a little extra money whether it be $10 or $100 per payday, you probably won’t miss it on your paycheque.
Great idea Deidre – thanks for your suggestion!
Great article! Having a good job/income can be a lure to greater debt – and often is the most difficult time to stay on budget. Living below your means, and saving something no matter the income amount – can help if those surprises come along.
I think we should plan for this to happen. Not wait to see if it will hit us. In today’s economy it’s less and less of us that end up experiencing something like this. Dragging yourself out of delinquency is a long hard journey.
It happened to us. I had surgery that has caused a multitude of problems resulting in 9 additional surgeries in 4 years. I was the bread winner in our family and my income went away. Disability was approved 3 years after the original surgery but doesnt come close to what our household income once was. FORTUNATELY my husband and I have lived a very fugal lifestyle. We traveled but cars paid off, no car payments. However our medical expenses total well into the tens of thousands of dollars. We make payment arrangements as there is not possible way to pay our extremely high co payments ($750 for hospital/clinical visits, tests and surgery).
Your advise is right on target and I cant stress enough that being prepared for the worse will go a long way.
Oh my goodness thank you so much! I didn’t even know there was income insurance and now I’m looking into it. My husband and I have been going through loopholes to get him a diagnosis for treatment for his supposed rheumatoid arthritis so he can go back to work and we have been put off over and over. If I could find something like that it would seriously be a blessing. Thank you so much for this bit of information!
One of the best things I ever did was pay off my mortgage. It seems housing is one of the larger expenses. I worked two jobs to do it and didn’t buy more house than what I needed. I’m retired and can pay my bills AND eat:). Also: cut the cable, all I have is internet and I saved $1,200 a year. Use what you have, maintain & fix everything yourself…….cut your own hair, repair & clean your own clothes.
There has been some negative press in recent years about paying off your mortgage vs investing for the future. I’m with you though Marta – I can definitely see the security benefits of paying off your mortgage once and for all!
I have been what seems like forever, paying my car loan. When I got the car I was in a horrible mess. Long story. The interest rate is 10℅. I know really high. But my thought was to find a credit card with 0℅ and pay off the car. This way I can get the title. Oh did I mention I am up side down 2000$ on the car as well? Yeah I need to do something. At least when I get the title I can sell the car and I will only have 2000$ in debt to pay. Is this a good idea or am I out of my mind?
Having to downsize happened to me many years ago. The first thing I did was to take in a roommate. Though my place was small it was a way of slashing money i needed to pay my living expenses. I also did side hustles( babysitting, tutoring, cleaning windows…) I cut where ever I could in my monthly expenses and saved everywhere I was able. When my income got better ( over time) i continued to keep my costs down and save. Though it was a rough time, it was well worth it. I learned about doing a bear bones budget. I still do it, especially when I’m saving for something special.
Hi, My name is Robin, I am from Erie PA.I am on disability.Thireen years ago right after I got my BA in Social Work, I started working for The Office of Children and Youth Services. Though it wasn’t my dream job, I still accepted it and was there just 3 months when I started showing signs of Multiple Sclerosis I was falling alot and suffered from constant vertigo, and numbness to my whole left side. So 13 years later, I am in an electric wheelchair and on February 2nd after having a wound that wouldn’t heal, I had an above the knee amputation, and I know require homecare and need getting moved, I have a wheelchair van and I can no longer drive.All these years later I took $10,000 loan out for five years and I just made my last payment today. I keep reading all these things about side hustles, My problem is I don’t know how to start one in my past I was really good at Arts and crafts so I have been coming up with ideas, but I just don’t know how to get myself out there. I just need to make an extra 2-300 a month. I just need someone to show me the best way to get started.
Hi Robin – wow you really sound like you’ve had a lot of bad luck – and I really feel for you. Unfortunately Arts & Crafts isn’t my forte, but I’ve heard good things about people selling their homemade products on Etsy etc. I would imagine that Pinterest could be a great source of traffic to your Etsy site. Be aware that in my experience of side hustles it can take a fair amount of time and effort learning the ropes and figuring out what works before it starts to become profitable. Therefore if you’re tight on cash always try to look for free or cheap ways to get started; don’t get suckered into buying an expensive course (at least to start with). Best of luck to you Robin.
[…] coming too close to bankruptcy, then you can avoid taking that step by downsizing your life. When every cent counts, it’s essential that you are not spending money on luxuries. It could be that you move to a […]
I joined a food coop. We get veggies and fruit with bountiful baskets.org and quite often other members suggest cooking techniques or recipes. I’m more of a minimalist now too. I only wear neutral colored shoes, slacks and skirts. No one notices. Dressing is easier and it’s budget friendly. Sewing has been my biggest help and side hustle.
I stock up on nonperishables. I keep a three month supply of laundry detergent, tooth paste, paper goods, sugar, flour, coffee canned goods etc. If I were to get laid off I have what I need. I only need to buy fruits Vegs, milk ( I keep a box on non-fat dry milk on hand) for emergencies.) etc. I also have a generator to keep me going in case of power outage ( or if they cut my electricity) I too have $$$( 3 months expenses saved up.) ALWYAS live below your means!!!!!!!!!! I pay my car insurance and house insurance for a whole year ahead. NO credit card debt. Buy second hand if needed.
Hi I’m Eva I’m retired. I keep a generator in case my electricity gets cut off. I baught it at the second hand store. I pro rate my insurance bills the Costco Membership, the car registration , trailer registration bill and save all year then around September I pay all of it for the next year. I save money that way. I keep 3 months expenses on hand saved up. I buy bulk paper goods, staples, laundry detergent, bleach, just the basics. I keep six week supply of canned goods, and foods. My next project is to invest in a freezer that way I can buy meats on sale. I buy specials all the time and buy extra for a rainy day. I have always lived like this since I came from a communist country where you went to the store and there was nothing to buy at the store. Always live below your means. Keep cash on hand. Buy gold!