This happened just a few years ago, I probably wrote about it before, but it illustrates how life can change on a dime and the importance of having your personal finances in order to mitigate the damage.
We were about a year into our home ownership in a higher cost of living community. That meant better schools, shorter commute, but more house payment. Even though our house was marginally bigger (~2,500 SF) than our old house (~2,200 SF), the layout was better but the costs were probably $500/mo more than our starter house we lived in for a decade.
About a year and a half prior to this point in time my wife Holly had enough at her job and took an opportunity for a position as head of sales and marketing at a small firm with unsteady leadership. It meant some major life changes for us. First, she started traveling a lot more and so more of the kid and house obligations fell to me, which sort of sucked in several regards. Second, she got a nice bump in salary and was making about 20% more than I was, so we were able to start saving more. Combined with lower childcare expenses since both kids were finally in school, we finally breathed a sigh of relief. To that point we had both been grinding in our fields for about 15 years and it finally felt we were getting traction in our goals. We were able to pay off my car loan in less than two years. We started getting dang close to maxing out our retirement accounts. We even started saving for the kids college more earnestly around this time – this was a lower priority (as it should be) than socking away money for retirement. The point is, we felt that our hard work was finally paying off.
Then the floor dropped out. I get a call from work one morning from my wife – she had just been fired. She had felt something “off” the previous two weeks, so it wasn’t entirely unexpected. Still, it is still a harsh slap in the face when you’re let go. She came to my office after she packed up her few boxes and we talked things over. We knew the dust would take a little time to settle so we collectively took a deep breath as we figured out our plan.
While I don’t remember the details, but our situation in the short- to mid-term was somewhat ok. She received a small severance and was eligible for unemployment income. It was a fraction of what she was making, but helped to ease the pain a little and really bought time for our situation. Our personal finances were in pretty good order – we didn’t have credit card debt, our house payment was about half of the general rule recommended for our income (28% for mortgage, or 32% of total house payment), and the Ace in the hole was $10,000 emergency fund we had just finished squirreling away over the previous several years.
Having the ability to then flex our other savings acted as the other dials and levers to further lower our expenses. I lowered my 401k down to 10% (from nearly 20%), we stopped contributing to the kids’ college accounts, stopped savings to our other “cash payment” accounts (for vacation, future car, etc.) and now didn’t have child care expenses since Holly was now home in the summer or after school. When we finally ran the numbers, the timeline looked liked this: we had about 6 months of job hunting time for Holly before we tapped into the emergency fund to supplement our income, and then if we were careful, we had up to another year before things would really be dire. We knew that would be plenty of time to find a new job. Life then went from “Holy Shit, what the hell are we going to do?!” to “We got this, it may not be what we planned, but we’re going to be ok.” It was a huge weight off our back.
The post script is that she negotiated a new job making just a hair less than her well paying one that she just lost, for a company she had built a relationship with over the previous couple years. I think it took about three months to go from no-job to job, and at the end of the day we were really no use for the wear.
Here are my key takeaways:
- Spend less than you earn. (duh)
- Have a high savings rate affords you the ability to scale back when TSHTF. I liken it to a teeter totter: the more you save, the less you have to spend, so when you have to spend less, you can simply dial back on the higher level savings to deal with something like this while more or less living the same lifestyle.
- Don’t over extend yourself on a house payment – be sure to factor in taxes, homeowner’s association dues, and insurance into that mix. The lower that percent of your income, the more flexibility with your money. I think all our house costs (excluding things like landscaping) is about 14% of gross income today, but when we bought it was probably closer to 18% of gross – still well below the recommendations. But we also have one of the smallest houses in our neighborhood.
- Having an emergency fund helps you sleep better at night. They say three to six months of expenses, but find a number that works for you given the volatility of your job, if you’re double or single income, if you have other side hustle money coming in, whatever. This also allowed Holly to be selective in her job hunting and took the pressure off her to take the first one that she could grab.
- Having no or limited debt really takes some of the risk away in times of low cash flow. We weren’t worried about declaring bankruptcy or having creditors hound us in this mentally tough time.
Getting to this point of having the above was a grind, and we dug out of it over 14 years as I explained in this post. We’ve had many discussions over the years on money and spending. And while we don’t see eye to eye sometimes, we know that our future selves will thank us. As a result, we drive less fancy cars than our neighbors, our wardrobe is tried and true things that aren’t updated frequently, most of our vacations are camping or less expensive, and we prioritize cheap experiences over things. Mostly at least. My wife is a little techy and wants nicer things than me, but that compromise is apost for another day. It is hard sometimes to resist the magnetic pull of keeping up with the Joneses, but peace of mind is worth so much more. Future financial freedom is worth more.
Losing a job is hard, no matter how you slice it, but it doesn’t have to be the end of the world. It takes planning and discipline, but better to pay money in the proverbial bank for the rainy day that never comes instead of the alternative.
Any other stories are welcome in the comments.