financialcounselor

If the Income Drops, Save yourself Trouble, and Drop the Spending

In Lesson of the Day on February 27, 2011 at 6:34 pm

2 + 2 CAN NEVER EQUAL 5

One of the best pieces of financial advice I can give is this: If your income drops– because of a cut in hours, a job change, why ever–the first thing to do is put together a budget to determine your new financial situation. If you need to cut some things out of your budget to save money, do it immediately.
So many people come to us for help with debts that they accumulated keeping up with their old spending habits even though they saw their income drop. This is another major cause of headaches that can sometimes be avoided.
Arthur and his wife Mary were one such couple. They had been planning a vacation to Hawaii for the past year. They’d always wanted to go, and finally they decided to do it. However, three months before their trip, Arthur got laid off. Mary was working but didn’t earn nearly much as him.
Arthur and Mary were faced with a dilemma. Should they keep their plans or cancel the trip to save money? They didn’t want to lose their deposit. They fretted about what to do. Many of their family and friends urged them to just go on their vacation and get away from it all, forget about money problems for a while. After all, their friends said, ‘You guys have earned it, working hard all these years.’
So they took their advice to just do it.
“We should never have listened to other people,” Mary said. “Art wanted to cancel the trip, and that’s what we should have done. He was right.”
“How much did the trip end up costing you?” I asked, preparing myself for the worst.
“Thousands!” she said. “It’s freaking Hawaii! That was so stupid of us. I never thought it would take as long as it did for him to find a job.”
“How much was the deposit you didn’t want to lose,” I asked.
“It was only five hundred bucks,” she said.
What those well meaning friends and family members probably didn’t know was that Art and Mary had only $5,000 in the bank. Five grand is a lot of money, but when you’re constantly picking at it to pay your major bills, it’s going to go fast. And that’s exactly what happened. By the time it came time to leave for Hawaii, it was half gone. Art was receiving unemployment by then, but it was barely enough to cover their bills even with the help of Mary’s salary.
So as they drove to the airport, instead of happily anticipating the vacation they’d been dreaming about for years, their thoughts of fun in the sun were distracted by the fact they had no money, no job prospects, and would very soon be facing enormous bills from the trip.
It took Art a total of 10 months to land a job that paid him more than the unemployment. By that time they were up to their eyeballs in credit card debt, and the harassing phone calls had begun. They even called Arthur at his new job. Just what he didn’t need.
“We didn’t even have a good time in Hawaii,” Mary cried. “Can you imagine that? We’re on vacation in Hawaii and we’re worrying about money. Everytime we had to swipe a credit card I got a pain in my stomach.”
I felt bad for Mary and Arthur. If they’d just canceled the trip, they might have come out of the job loss okay. Even if they lost their deposit, they wouldn’t have given themselves that huge bill to pay. The travel and lodging was $2,000 alone. And as Mary and Arthur discovered, everything in Hawaii’s touristy areas is quite expensive.
Of course, the cause for their money problems was Arthur’s sudden job loss. But his unemployment benefits, together with Mary’s income almost covered their monthly bills. Plus they had the five grand in the bank.
Mary and Art could have probably gotten through his job loss without all the stress and harassing collection calls they endured. Of course, they would have probably still used up all their savings even if they hadn’t gone to Hawaii. But they set themselves up with a $3,000 vacation tab to pay off with no job. And they already owed about $2,000 in credit card debt at the time. Barely paying their bills, they had no extra money to send to the credit cards, so the balances skyrocketed, along with the required payments.
As much a bummer as it is to cancel a vacation, the fact is, Hawaii isn’t going anywhere. Art and Mary could have rescheduled the trip after they’d regrouped from his job loss. Then, the trip would have been a celebration, a triumph for them over their adversity. Instead, they went to Hawaii and didn’t have fun. That is the real bummer.

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