debt

Revamp your financial plan as life changes

Financial planning
Highlights
  • Have an emergency fund that will cover your expenses for at least three months.
  • Remodel your financial plan to reflect a reduced income.
  • If your mortgage rate is 5 percent or higher, you should try refinancing.

Most of us experience wide fluctuations in our income sometimes in our lives. Either job loss wipes out our emergency fund, or we're showered with wealth from an inheritance. Without a financial plan, either scenario can spell disaster.

What should you do when you have a drastic change in your income? First, take your financial temperature reading by figuring out how much money you need to meet the basic needs.

If you've followed advice from financial professionals, you'll have an emergency fund that will cover your expenses for at least three months for those times when your income takes a financial hit.

"Prepare for ups and downs," says Michael Eisenberg, CPA and personal financial specialist with Eisenberg Financial Advisors in Los Angeles. "Sometimes they are hard, and sometimes they're fabulous. Either way, you'll get through them."

When income falls

During the recent financial crisis, many workers have been laid off and jobs have been eliminated from the workforce. When that happens, grieving is inevitable, says Cal Brown, author of "When Life Strikes: Weathering Financial Storms."

"But you need to get through it quickly and focus on your new job, which is getting a job," Brown says.

In the meantime, you'll need to remodel your financial plan to reflect your reduced income.

Eisenberg suggests making a list of inflows and outflows and dividing the list into necessary and optional expenses. Include what you currently spend on housing, insurance, utilities, credit card debt and food.

Now look at the optional items to see what you can eliminate and where you can cut back, Eisenberg says. Can you cancel your gym membership and jog, walk or bike instead? Cutting down on dining out and movies, canceling cable and only keeping your cellphone might be ways to slash expenses.

"If you regularly visit an ATM on Friday to withdraw $50 or $60 and it flies through your fingers during the weekend, you need to get control of that ATM habit," says Eisenberg.

Fixed obligations might be harder to manipulate. Check into refinancing to get a lower interest rate on your mortgage. If your current rate is 5 percent or higher, you should try refinancing, Eisenberg says. Could you take in a roommate or renter to help with the mortgage? Consider moving in with your adult children or your parents, depending on your demographic.

Is buying a smaller, more efficient car an option? Can you sell some of your assets in order to meet your expenses?

"Only use your retirement accounts as a last resort," Eisenberg says. "They are taxable, and if you're under 59½ years of age, you could incur an additional federal tax penalty."

If you're still stuck, ask for advice. Your church or community may offer free financial counseling. Credit repair companies also offer ways out of trouble, but vet them carefully to make sure they're legitimate.

When income climbs

When you secure a job and get back on your feet, you'll need to reconstruct a new financial plan. A change in income means a change in how you spend and save your money.

Although a steep increase in the money you bring in is a good problem to have, you still need to have a financial plan in case your job situation changes again, says James Guarino, a partner with the accounting firm of Moody, Famiglietti & Andronico in Tewksbury, Mass.

"Start building up an emergency fund and preparing for retirement, and make sure you're properly insured," Guarino says.

Although you might be inclined to take a month's vacation or buy that new Jaguar because you've been deprived for so long, Eisenberg doesn't recommend it. This is a good time to find a certified public accountant or financial adviser who can help you.

You'll also want to avoid buying things that lock you into payments for a period of time such as a country club or golf club membership. Fixed expenses like that can drag you down quickly, Brown says.

"Buy on purpose and not to be noticed," says Brown. "There's nothing wrong with enjoying life, but be thoughtful about it."

Finances are often compared with dieting. For both, being prepared is the key to success.

"We don't know what will happen from day to day, so try to be prepared," Guarino says. "Look at where you are today financially, and see if you can do more. Can you save more, make more money or learn to spend less?"

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