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Start Cutting Immediately to Save a Sinking Ship

By , June 3rd, 2009 | 11 Comments »

An acquaintance came to me the other day and told me a sad story. She has been unemployed since December and unable to find work. Her husband also lost his job around the same time and although he has since found another, they went four months with no income and his new job pays considerably less than the one they lost. When you factor in her unemployment, they are now living on about 30% of what they made before. When all this happened initially, she called the bank that has her mortgage and asked for a period of forbearance. It was granted, but now that time is up and their situation has not improved and they have blown through the savings that they had. The family is now in danger of losing the house, has $40,000 in credit card debt, a loan on a second home, and two car loans. There is almost no money left to eat or buy necessities. The ship is sinking fast. (They probably could not realistically afford the life they were living prior to the job losses, but that’s another story.)

She asked me what she should do. I asked her what extras she had already cut out of her budget so I could get an idea of what might be left to cut. Imagine my surprise when she said, “We haven’t cut anything yet. I thought things would get better by now and we didn’t want to alarm the kids, so we’ve just kept things as usual.” I was floored. This is a family who is in danger of losing everything and they hadn’t changed anything about their lifestyle? What seemed like common sense to me was clearly not common sense to this woman and her family.

When you suffer a serious loss of income, whether it’s through job loss, pay reduction or disability, you need to start cutting extraneous things from your budget. Immediately. If you have a warning that you might lose a job, start cutting on the day you begin to feel uneasy. Every single day that you can reduce your spending means a little more money in the bank should the problem drag on long term. What’s the worst that can happen? You slash your budget to the bone and get a job the next day. Big deal. You can always restore things to your budget when things get better, but if you haven’t cut anything and that new job does not materialize quickly, it won’t take long to blow through any savings you have and end up in danger of losing everything.

When you lose your income, you cannot afford to live in denial. It’s painful, but you have to look at the possibility that the life you knew is gone, at least temporarily, and you have to act as though that possibility is reality. The longer you live in denial and try to keep things “normal,” the more money slips away that may be needed in the future. It may not seem like much to continue getting your hair done or going on vacations while you’re looking for work, but those dollars are dollars you might need for food and shelter three months down the road. The goal when your income drops is to get your spending down to the bare minimum and to stash as much cash as possible, not to try to keep everything the way it was before.

This woman was afraid that cutting spending and admitting that they could no longer afford vacations or toys every time they went to Target would somehow alarm the kids. Kids aren’t stupid. Even if you still take them on trips or buy them things, they pick up on the stress in the household. They hear mom and dad fighting over money. They know that mom and dad are stressed about something. Older kids especially know when something is up. And most kids, after about age six, are old enough to understand the basics of finance. They have a general idea about money, where it comes from, and what happens when there isn’t any. Worrying about alarming the kids should be the least of your worries. They already know something’s up and they are probably more able to deal with it than we give them credit for.

I recommended that she get busy cutting her budget immediately. I recommended all the things we normally talk about here on Saving Advice: Stop spending recreationally, cut out all non-necessities, renegotiate the rates on credit cards, eat at home, etc. I also told her that she needed to get busy selling anything that wasn’t nailed down and sell the vacation home. Still, she resisted. She simply didn’t want to admit that the large, fun life they had been living was now gone. I’m afraid that she will end up filing bankruptcy. The situation might be unavoidable regardless, but her inability to admit to and act on changing circumstances makes it almost inevitable. Had she been cutting from her budget since December and been selling unneeded items all along, she might have been able to spare herself at least some of the problems she now faces. She is likely facing a prolonged period of living in reduced circumstances, whereas had she acted swiftly in the beginning, she might have only faced a few months of a reduced lifestyle.

When you lose a job, and particularly in an economy like this one where new jobs are hard to come by, you have to start cutting immediately. Every cut you make early in the game buys you more time later. It isn’t fun to give up all your luxuries and it’s demoralizing to admit that you’re living in reduced circumstances. But you need to stash all the cash you can to weather what might be a prolonged period of unemployment. Ideally you’d have a large cushion already saved but if you don’t, you need to find money quickly. Every day that you wait puts you one day closer to being in this woman’s situation.

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  • Broken Arrow says:

    Wow, that’s surprising.

  • Joan says:

    So, if their credit cards were at $0 in December when all this started, that would mean they were charging an average of $6,666 a month…plus not paying their mortgage? Hooo-weee. The kids may not be stupid, but the adults?

  • Jackie says:

    It’s situations like these, ones that are largely avoidable, that make me mad when someone declares bankruptcy. They couldn’t do anything about being laid off, but to keep spending and not take logical steps to reduce their debt load are just so maddening.

    That said, I hope that they get their finances going in the right direction. I hate for anyone to get in desperate straits even if it is mostly their fault. I just hope they don’t take a shortterm view of their debt and think that it’s better to declare bankruptcy than spend a couple or four years paying things off.

  • Doug says:

    It would seem they would sell 1 car and the second house. That way it would at lease free up two expenses.

  • Diane says:

    This is a sad story… not only the loss of jobs, but the inability to deal with reality.

    I’d be willing to bet that their credit cards were not at $0 in December, and this downward spiral started BEFORE the job loss.

    I hope they can turn it around to save their home, but it sounds like they are unwilling to make the obviously necessary moves to do that.

  • Natalie says:

    You would think one of the parents would at least get a temporary job delivering pizzas or something, just to get some income coming in. Way too much pride I guess.

  • Texas Girl says:

    Oh my GOSH! I’m horrified. I know I’m cheap, but we haven’t lost ANY income, but started feeling uneasy back in the fall during election time and cut out EVERYTHING at that time. We have no cable tv, don’t eat out, and don’t go on vacation or buy ANYTHING. Our friends think we’re weird but I don’t think I could survive your friend’s situation. What sickens me the most is that obviously they had a substantial income before…imagine how much they could have saved and been PREPARED for this disaster (had they not bought a vacation home for instance)….and now the taxpayers will have to bail them out because of their materialism and stupidity.

  • Stacy Adcock says:

    Agree completely Texas Girl. I’m amazed that people still think and act this way but honestly I see it every day. My husband and I cut out everything when we decided to pay off our debt 3 years ago and now that it’s paid, we continue our cut back lifestyle; we didn’t add anything back except a dinner out here and there. As any fan of this blog site knows, life can be very fun without spending a lot of money. I hope they don’t file bandruptcy.

  • Gail says:

    What are they planning on telling the children when they end up on the street without even a car because they have lost everything? I can’t believe someone would just keep on spending when they have lost their jobs. Unbelievable!!!

  • Cindy M says:

    Hard for me to express anything but disgust and sarcasm here. I’m most definitely not sympathetic for anybody but the kids. What irresponsible, dishonest, lazy parents these two are. You don’t keep spending money you don’t have. They aren’t teaching the kids anything smart and useful but gee, how can they when they aren’t too bright themselves? Are these two college grads? If so, what a hoot.


  • Monroe on a Budget » Reality check: layoff means cut back on expenses! says:

    […] Jennifer Derrick has a story at the Personal Finance Advice blog about a family who is dealing with unemployment. […]

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