Do you have an emergency budget plan?

life-on-severance-comfort-then-crisis.html: Personal Finance News from Yahoo! Finance: "Although their rent was cheaper, Mr. Hipsher says the family continued to spend like before. They moved with three cars -- two BMWs and a Chevy Silverado. They continued to buy cases of $36-a-bottle wine. They spent $250 a month on a cleaning lady, and Mr. Hipsher dropped $50 a week on flowers for his wife. The couple still dined out regularly."

The article talks about families burning through severance and savings and finding themselves out of cash and still unemployed. Most of the families started out as prodigious spenders and continued to spend lavishly when the $100k+ jobs disappeared; one family had pretty modest tastes (relative to income) and is still worrying.

When the economy started to turn sour, my family put together a budget that we call "survival mode." We already had a budget for buying a house, which we converted into a budget/spending plan for our day-to-day spending before buying a house. Survival mode took a while to put together - we took our existing budget and slashed, slashed, slashed. We didn't slash to the bone. We kept Internet access - although we downgraded to dial-up. We kept in mind that unemployment and severance incomes are taxable, and we budgeted for taxes. We tried to be realistic about what expenditures brought a lot of happiness, a sense of normalcy, or were very important (health insurance, for example). Still, it took a lot of soul-searching to decide which spending categories really matter and which are luxuries that we can live without.

Two things happened. One, we converted the vague anxiety about possible loss of income into the security of having a plan to survive. This is important - having a plan already in place means that we can activate plan B if we lose our income - rather than absorbing the loss of income while also frantically cutting expenses, or, as the people in the article did, continuing to spend until the money runs out. Two, we had some really good conversations about what is important. We made some of the "survival mode" cuts right away. Cable TV, for example, didn't rank high on our priorities. It was nice-to-have, but then the cable company raised rates and we realized that we just didn't get that much enjoyment out of it. So we cut cable. That freed up money for increasing savings. We also realized that the $60,000 severance that the couple in the article received, doesn't go very far when housing costs $24,000 a year (and taxes eat up a big chunk of severance money, too).

When lay-offs got too close to home, we reminded each other "it wouldn't be the end of the world. It would suck, but we would survive." We would trot out the survival-mode budget and say "look, we'd still have money for networking lunches and a nice dinner in." When stress ran high, we would remind each other than we can make it. So instead of wasting energy on worry, we could focus on moving forward. We can be strategic. We can still contemplate buying a house (although we are being cautious and we would not consider spending 40% of income on a house right now. I think that a house with room for a garden and zoning that allows chickens or sheep, would actually be a benefit if times got tough - although having a renter's freedom to move on a moment's notice has its benefits, too).

We tried to be realistic - we didn't say that we will live on library books and rice and beans, we left some money in the budget for sanity and a sense of still having choices. We kept the "lunches at work" category for networking lunches; we kept (downsized) charitable contributions and gifts. We kept health insurance, life insurance, car insurance and homeowners' insurance. We kept the budget category for healthcare co-pays. We cut groceries a bit. If things went really badly, there is more room to cut back.

Having a plan is an optimistic choice. We know we can survive on less than we earn (though, naturally, we'd prefer to increase our income). We don't have to stick our heads in the sand and say "it's too horrible to contemplate!" And we know that we need to beef up our savings if we want to have the security to stay reasonably comfortable in a financial crisis that can leave well-qualified workers out of work for over year. It is far better to realize that while money is still coming in, than to realize it after the money has run out, as so many of the people in the article did.

Families can pull together and get through anything. It's a family effort, and it helps to remind the family about the benefits of cutting back to save more, or cutting back to outlast a crisis. The fellow in the article spending $250/month on a cleaning lady ($3,000 a year) after losing his job - I bet his wife would rather have $3,000 in the bank now. It is definitely hard to adapt to a major reduction in income, but writing a what-if budget helps you prepare mentally, and if things go awfully wrong, it lets you put the austerity budget on auto-pilot while you grieve for the job, security, and lifestyle lost and get to work moving on. Give your family the gift of peace of mind. Work on building a 6-12 month emergency fund. If you need it, you will find that it is worth far more than memories of watching cable TV, eating out every week, or having a professionally cleaned home.