A few years ago I launched a small business (“side hustle”) that quickly took on a life of it’s own. Within weeks my business was generating twice the income of my full-time job – and struggling to find enough time in the day to do both.
After some careful thought – and with an emergency fund in place – I opted to quit the secure yet hellish job I was working and instead focus on my business.
All went well for a while as I focused on doing something I loved and watched as the money kept rolling in. But as they say, all good things must come to an end and while I won’t bore you with the details the business eventually went up in smoke. And with it, my income.
To say I was concerned about my immediate financial future was an understatement. More than a few nights sleep were lost over the problem.
You know the old classics about “living within your means” and not letting lifestyle inflation swallow any salary increases but here’s another question for you to consider…
What if your income dropped significantly – or even stopped altogether – tomorrow and without any warning. How would you cope? What downsizing tips can you employ to rapidly reduce your expenses?
Hopefully if you’ve been squirreling money away you’d have some kind of “emergency fund” saved up that you could call upon to relieve some of the short-term pressure, but what if the problem was likely to be longer term?
What if you got sick, or had to take care of an elderly relative, or your business went bust or you were made redundant?
Certainly there’s a good chance you could recover (eventually) but most personal finance experts seem to recommend an emergency fund that covers 3-6 months of living expenses. What happens after that in these extreme circumstances?
You see, even if you’re living within your means, and intelligently managing to increase your savings every month, one of the most important downsizing tips that few of us consider is how quickly we could reduce our living expenses if we had to.
Consider for a moment all the financial obligations that many of us take on. A mortgage or rental agreement, minimum payments on credit cards, utility bills, cell phone contracts, gym memberships and so on.
Certainly in lean times you could eat out less, buy cheaper foods, drive less and so on – but what about all these financial obligations that you just have to meet for contractual reasons every month no matter what? These obligations are what can really burn you if you’re not careful.
For example, just imagine that you’re half way through a 12 month cell phone contract that costs you $50 a month. If a financial emergency arose, could you downsize or eliminate this cost with immediate effect? Probably not. You’re stuck with it, like it or not. And this same principle may apply to all manner of monthly costs that you’ve been inadvertently stacking up, one on-top of another, for years on end.
The simple fact is that to retain control of your finances in these “extreme” events it’s important to have a ready-made plan in place so that you can downsize your finances as quickly as possible.
After all, if you can halve your outgoings at any moment then if necessary your six month emergency fund instantly covers you for a year. Alternatively even flipping burgers at McDonalds will go a decent way towards covering all your radically-reduced new living expenses.
Downsizing Tips: How To Rapidly Cut Your Expenses
With that rather worrying (but none-the-less important) realization in mind, here are some simple steps you can consider. Think of them as “insurance” against a sudden and potentially-prolonged drop in income. And while I hope you’ll never need them, if and when the time comes, you’ll be glad you’d prepared yourself for just such an occasion…
Cut Your Expenses Before The Emergency Occurs
Ensure at least a portion of your savings are freely available to you at a moments notice rather than being tied up for the long term. This way, if you need to dip into your savings you won’t have to wait weeks to access the funds that’ll keep your head above water.
Don’t Upgrade Your Cell Phone
Any form of contract that requires monthly payments limits your ability to rapidly downsize your spending. Whilst contract phones generally offer far better value for money than prepay phones, they can put you at a disadvantage if you need to cut costs quickly.
There are a number of ways you can mitigate this risk though. Firstly, you can look at monthly rolling contracts that don’t tie you in for a long term. Or you can take the option I’ve chosen which is essentially not to upgrade my phone when my contract reached it’s end.
This has two real benefits. Firstly, as I’m out of “commitment” I can end the contract at any time without penalties only needing to give 30 days notice. Secondly, if and when I ever damage/break my phone (which is a very rare occurrence for me) I can always then opt to upgrade and hence get a “free” phone.
Of course the only real downside to not upgrading is that you’ll need to stick with your current handset for a while, but given the potential upsides I think it’s a compromise worth making.
Prepay Whenever Possible
There are a range of bills that can either be paid one one lump sum or spread out into monthly installments. Two perfect examples are computer backup services and car insurance.
Generally, by prepaying for a set period of time you’ll not only get a discount but you also won’t have to worry about making that payment every month in the future if your financial circumstances change considerably.
Look For Shorter Or Rolling Contracts
I’ve been considering joining my local gym, but I hate being tied into lengthy contracts. This is especially so for gyms, where so many people flake out after a few weeks and end up paying for the rest of the year even if they never step foot in the gym.
However I was interested to note recently that one of my local gyms has addressed this and now offers contracts of only 3 months in length rather than the standard 12. The cost may be slightly higher but my financial obligations – and hence risk – will be far less.
So whenever a contract is involved that requires regular monthly payments like clockwork, try finding out whether they, or any of their competitors, offer shorter or rolling contracts that puts you at far less risk.
Investigate Income Protection Insurance
Income protection insurance is another way to reduce the risk of a sudden drop in your income. While you’ll pay for the privilege, this form of insurance can help to ease any worries you may experience and make it far easier to get back on your feet afterwards.
Pay Off Your Debts
Most debts require regular payments, no matter how small they might be. Whether that’s a loan, credit card, mortgage or car payment, the more of your debt you can pay off the less your monthly financial obligations will be.
So cut your spending and instead invest your extra capital into finally paying off those debts that have been hanging over your head for so long. Best of all, making that final payment on any sizable debt is simply the best feeling in the world!
Update Your Resume
There’s nothing worse than losing your job and having to start your job search from scratch. From creating a resume to printing it out, locating possible jobs to apply for, getting your suit ready for interview and more there can be a lot of steps between needing a new job and actually landing one.
I think it’s smart therefore to constantly update your resume so it’s ready for action whenever you need it. No messing around trying to find an old copy or remembering what your exam grades were from a decade ago. No, keep a copy of your resume on your computer and update it every six months or so.
That way, if you ever do need to apply for a new/additional job with very little notice, you won’t have the waste hours or even days trying to create a resume to send out.
Start A Side Hustle
Starting your own small business – whether you clean windows on the weekend or start a blog in your evenings – can be another handy way to mitigate any sudden drops in income.
By slowly attracting customers and figuring out how the business works best you’ll have not only an additional side income to enjoy/save but you may well be able to ramp up this income opportunity rapidly if ever it’s needed.
Ask For Credit Before You Need It
Lastly while I hope the previous points, when combined with your emergency fund, will ease the pain of any sudden drop in income, remember that lenders are far less willing to offer credit to those with low incomes or no income at all.
Therefore, assuming you’re going to use the credit smartly and save it for a rainy day, for some people – especially those without a sizable emergency fund – it might make sense to apply for an overdraft or credit card now while the going is good. Then, should the worst happen, at least you’ll have a little extra leeway to help get yourself out of any short term shortfalls.
How have you insulated yourself from possible sudden drops in income? Please leave a comment below with your thoughts… 
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