Getting Over The Hump!

Many people have been there: laid off from work, lost a large customer or the economy takes a downturn, you or your spouse gets sick or injured, and the money you count on is dramatically reduced. It becomes a “soul-searching” time.

Now, after the initial anger, fury, dismay, shock, annoyance, panic, alarm, consternation, and fear, what do you do?

First, do your best to rid your mind of the anger and doubts so you can think clearly (not an easy task, but possible-and necessary). If you have no control over the circumstances, meaning there is no way you can return to the previous situation in a short period of time, go on and plan for the new future. Get a new job, start your own business, go back to school, or whatever is needed to get back on your feet. Only you know what is best for you, and I am not here to decide that, rather to help you protect yourself and your family for the near future.

Here are my suggestions to get you over the hump until the new "normalcy" returns.

1. Determine your available money/cash available between you and your spouse. By this I suggest writing on a tablet, or spreadsheet, the amount of money currently in each of the following: a) checking account(s); b) savings accounts; and c) money market accounts. Add them together to get the total. (If you are a business, include your account receivable which is cash that will be coming in).

2. If you will be receiving Unemployment Compensation or Disability Insurance, write down the monthly or weekly amounts you will receive, or the lump sum amount, if applicable. Unemployment, at least in Ohio, is anywhere from 20 to 26 weeks, so if you know your amount per week, multiple by 26. If one of you is still working, add in their typical paycheck for the next 26 weeks, or half year.

3. Add the totals from #1 and #2 above. This is how much cash you have, or will have, available for the next 26 weeks. Circle, star, and underline that number! That is what you have to live with. Please do not fall in the trap that it is not enough and get angry or scared. At this moment it is your reality until you get yourself financially back to where you want to be, so continue to think logically and clearly. Put the emotions aside, as much as possible, for another time after you complete this exercise.

4. Print off, or download, the last 3 to 6 bank statements. Most bills are monthly, but some are quarterly, so 3 months should cover most of them. I prefer 6 months because it gives a truer picture, plus should include the property tax, insurance, and other items that only come every six months in many cases. Better yet, do an entire year of bank statements, but I know I am pushing my luck on that!

5. On your pad or spreadsheet, make a column for each general type of expense. For example, your columns would include such expense categories as (in no particular order): Home Phone, Cell Phone, Electric, Gas/Propane/Heat, Auto Insurance, Health Insurance, Life Insurance, Cable, Water, Trash/Sewage, Food for Home, Food-Restaurants, Gasoline for Car/Truck, Home Mortgage Payments, Car Loan Payment, Tithes, Entertainment, etc. I understand that you may add some categories, or not use some, but wanted to give you the typical ones.

6. If you use your credit card(s) to pay bills, do not just make a column for "Credit Cards". Please take the monthly credit card bill and put each item into the categories of #5 above. You really need to see where your money goes.

7. Do this for all the months, be it 3, 6, or 12 months. You will see that some categories will be very long, while others will be short. After entering all the individual transactions, total each column. Finally, take that total and divide it by the number of months you wrote down. For example, if you did six months of statements, and the column totals $6000, then divide $6000 by 6 months and you will have an average of $1000 per month spent in that category. Do the same for each category.

8. Next, add all the category averages that you calculated in step #7 above. This magic number is the AVERAGE AMOUNT OF MONEY GOING OUT EACH MONTH. Take this amount and multiple by 6, for 6 months. This number is what you would typically spend during a six month period.

9. Take the amount of cash available from #3 above and subtract from it the amount in #8 above (#3 amount minus #8 amount). If you still have a positive number, realize you can make it for six months. If it is a NEGATIVE number, continue to #10.

10. A negative number means you must either: a) find more money (which is probably, in most cases, not realistic in this scenario); or b) cut expenses. If you have more money, your problems are over, or delayed, but I now want to focus on the other alternative: reducing expenses. Cutting expenses will take a little reasoning or estimating, but must be done with a clear, rational mind. Please do not think that everything will be back to normal in a month so you do not need to worry! It is highly unlikely that everything can return to the "old" way in 30 days. If it does, wonderful for you, but plan for the long haul.

11. To save on expenses, try "cutting the fat" first. Look at your expense categories first. Are any truly unnecessary? Maybe Entertainment or Food-Restaurants or Charitable Donations/tithing? If so, make a commitment to eliminate them, or at least GREATLY reduce them. This will take will-power on you and your family's part. I cannot sugar coat it so it sounds easy because it will not be easy. You are used to doing it and you enjoy it, but it is the quickest way to save money.

If your total expenses are now under your income (#3 - #8), you are done. If not, continue to #12.

12. Look at the remaining expenses that are not obvious. How can each be reduced or eliminated? It will be a one-to-one decision, each with its own variables to think about. For example, cannot eliminate the cable? Then consider cutting some of those premium channels? Or downgrading the package to a lower monthly amount? Do you need the landline telephone since you have cell phones? Why is the water bill so high? Are the 10 minute showers turning into 35minutes? Do you need to fill the hot tub or can you do without? Does the thermostat need to be set at 68 degrees in the summer and 75 in the winter? A couple of degrees will make a difference. Are you going over your data plan on your cell phone? Watch it more closely and save $25-$75 each month. Do you have a consolidated cell plan, or are each member separate? If separate, you all are paying too much. Do a family plan to save. Do you need all the cars? If not, get rid of one. If you have health insurance, car insurance, or life insurance with the same person for years, maybe do a price comparison. Pricing does change over the years, and maybe it is time to re-evaluate (I can give you names of people/companies around central Ohio. Just contact me).

13. The above reductions or eliminations should get you to a positive balance. If not, you have no choice but to take more drastic steps. Maybe take a part-time job just to bring in extra cash, or downgrade expenses even if you do not want to do that. Get rid of the cable. Opt for the lower coverage insurance. Get rid of the kids cell phones. Plan the grocery purchases before you go and choose cheaper store brands.

I do NOT suggest touching your IRA. There is a substantial penalty if you do if you are not already 59-1/2 years old. If you are in the 20% tax bracket, the amount you withdraw will be taxed at that rate PLUS a 10% penalty. You will give the IRS 30-35% of that hard earned IRA! The worst part is that when you do your taxes next year and are expecting a refund, the preparer tells you that you owe, you will be worse off than you are now. (Note that some 401K's allow loans, but that loan repayment must be included in your estimated month cash expense/outflow).

In summary, in a financial downturn, options are there. I find people adapt to what they have after they analyze the situation, and after doing the cost-cutting for a period of time, that will now become "normal". The difficulty is getting into the habit of the "new-normal". Plus realize that it does not have to remain that way with hard work and the willingness to do what it takes to get back to the “old way”.

Good Luck!