4 Steps to Prepare for Losing a Paycheck

We explore things you can do to prepare for losing income due to a job loss or a long illness.

By + More

The Boomerater™ Report, our weekly collaboration with online baby boomer resource Boomerater,  this week explores things you can do financially to prepare yourself for a possible loss of income. Here is the question from a Boomerater member: “What are steps I should take to make sure I am in good financial shape? My wife’s job may be eliminated next year and I want to make sure we are prepared in case it happens. Also, should I continue to contribute to a 401(k)? We could use the extra money now.”

[See How to Get Your Finances Back on Track in 6 Steps.] Make sure you have an emergency fund. Especially now with unemployment rising, it is good to have 3-6 months of cash available. Your emergency fund should be able to cover necessary living expenses such as mortgage, utilities, food, etc. The rule of thumb is three months' worth of expenses if you have two income earners and six months if there is only one income earner. The purpose of an emergency fund is to help you through those difficult times, such as illness or job loss, without having to dip into retirement accounts or take out loans. An emergency fund should be in an easily accessible account but one that you only dip into in case of emergencies.

Spend less than you make and save as much as you can. It sounds almost too simple, but not enough of us do it. Make sure you are not making any unnecessary purchases and building up any debt. And by all means continue to contribute what you can to your 401(k), even if your employer is not matching the amount you save. You’ll still benefit by reducing your taxable income, while adding to your retirement account. However, if you do not have your emergency fund established, that is a priority and you may need to temporarily reduce your retirement savings until your emergency fund is in place.

[See Target-Date Funds Finally Showing Solid Gains.]

Review and rebalance your portfolio. With the changes in the market in the last year, most portfolios are no longer in proper balance. Having a balanced portfolio helps to minimize risk and maximize return. Your balance will depend on your age, risk tolerance, financial situation, number of years until retirement, and current financial situation. The goal is to reduce risk (chance of losing money) through diversification, while increasing your return. A very rough rule of thumb is to have your fixed income percentage equal to your age. Fixed income investments include bonds or preferred stocks. They produce a regular or “fixed” amount of return. The rest of your portfolio should be diversified in equities (stock) using low expense index funds. This advice was provided by Teri Tornroos, a featured financial advisor in Boomerater’s financial advisor directory.

[See Should You Manage Your Own Portfolio.]

Pay off credit cards and lower interest rates. Another Boomerater member wrote: "Credit card companies charge higher interest rates than anyone else you probably deal with, so keep them paid off every month. But if you are strapped with credit card debt, you may be able to get your interest rate lowered, saving you a lot of money and avoiding damage to your credit rating. I had success in getting my credit card interest reduced by asking the credit card company to lower it. I had been a good, pay-on-time customer for many years and I used that to my advantage. I asked them what my interest rate was and asked them to lower it so I wouldn’t have to look around for another credit card provider with lower interest rates. They immediately shaved 10 points off the rate! I found out this trick through lowcards.com. A friend had a similar outcome through information he received on bankrate.com and credit.com. The bottom line is that they make so much money off of you, they don’t want to lose you to a competitor. Use that to your advantage -- act like a valued customer, not like a victim when you talk with them."

Read other member tips on preparing yourself financially for a potential loss of income on Boomerater.

Boomerater is an online resource for baby boomers, with local directories to help you find everything from a New York financial advisor to California independent living communities. The site also contains forums where boomers can post questions and swap first-hand experiences. If there are questions on your mind that you would like answered by other people who have faced similar situations, or you have advice of your own to share, go to Boomerater.com and participate in the forums. Say that The Best Life sent you.