Suddenly losing some or all of our income can be terrifying. We wonder how we will pay the bills and not lose everything we’ve worked so hard for.
That is a natural reaction, because our basic needs for security and safety, as identified by Abraham Maslow, feel threatened.
Sometimes our instinctive financial coping mechanisms can be counterproductive for our mental health, and when navigating a sudden change, we need every bit of emotional resilience we have.
To help you control what you can control I offer you the following sequence of actions. (These steps presuppose you’ve already applied for eligible income support.)
1. Use a hub account as a reservoir
When you’ve got more than one income source plus are supplementing with savings it can be a headache to manage. That’s an extra energy drain we don’t need during challenging times.
Restructure your savings into a hub account that acts as a reservoir. Capture all income sources in the reservoir before a single flow onto your everyday account.
This also enables you to quickly get a sense of how long your money may last, which helps you respond to the natural fear of losing everything.
2. Pay yourself a steady wage
When your income flow is inconsistent in timing and amount it’s extra hard to know what’s affordable. In combination with the first tip, smooth your income by paying yourself a steady wage from your hub account.
To quickly get started, set the initial steady amount as the net amount per pay cycle that you previously spent. Shorter pay cycles, such as weekly or fortnightly, tend to be easier to manage.
More on how to do this here
3. Separately cover your commitments
Another big part of the stress is the ability to pay ‘bills’ and other commitments when they are due. This includes automatic deductions and other essentials, like groceries and utilities.
To relieve the stress and reduce your mental load I recommend ‘covering your commitments’ in a separate account.
Calculate the average amount per pay cycle you need for commitments and automatically transfer that to your commitments account from your everyday account.
4. Isolate impulses and indulgences
I’ve never been to a buffet and not over-eaten – I don’t have enough willpower in that environment.
Every day we are surrounded by a spending buffet and one of the great challenges in being money smart is resisting the abundant temptation of things to buy and do.
Total resistance is futile, especially in stressful times when willpower becomes even more fickle and unreliable.
Instead allow yourself a small amount of pre-allocated guilt-free spending for retail therapy.
Very important – ensure you’ve done the previous steps before working out how much to allocate to indulgences.
5. Trim the excess
By first completing the previous steps you will have a sense of how much you need to cut, which helps you identify savings calmly rather than chaotically in a panic.
Cutting your spending can be a confronting task, so to maximise your savings for your effort apply a methodical process.
- First separate your expenses into comforts and essentials and look for savings in the following order: Stop, Swap and Save. We’re often less attached to comforts so start by identify the comforts you can stop without really missing.
- Next identify comforts you can you swap for a lower cost alternative, such as a home picnic rather than dining out. Most expenses that fit this step were shutdown, so as businesses reopen be conscious about what you add back in.
- Finally, the more time-consuming step of shopping around for a better deal on comforts and essentials you want to keep. Methodically work through from largest to smallest proportion of your budget.
To help you categorise your expenses use a free version of one of the expense tracking apps.
6. Bolster savings with a ‘garage’ sale
Another way to make your money reservoir from step one last longer is to top it up. Finding yourself with more time on your hands around the house could be a great opportunity to finally sell items you no longer use.
7. Use credit and investments as last resorts
Even though instinctively to get us through a crisis we may immediately consider mortgage redraw, credit cards and selling investments, they should be last resorts.
Interest you pay is higher than interest you earn, so use savings first.
Since redrawing from your loan will increase the interest you pay it is akin to using credit to fund your lifestyle.
Whilst investment values often rapidly drop in a crisis, their rebound also tends to be quick. Panic selling investments before you need to can lead to bigger losses. Withdrawing from superannuation is selling investments, so also a last resort. If you are unsure what to do seek advice from a licenced financial adviser.
Money coaching during a career transition