Outline a budget and cut spending immediately. Prioritize essential expenses, use savings and minimize credit use. Get help if needed.
Q: After living on a tight budget for many years, we can’t believe we might have to do it again. When my husband and I met, we were both students surviving on student loans and part-time work. After finishing school, we got married and were lucky to land well-paying jobs in our chosen fields. With stable incomes and an eye to the future, we decided to buy our first condo a few years before the pandemic. Thankfully, my husband kept his job during COVID, and my employer topped up my maternity pay, allowing us to save some extra money during the lockdowns. However, I’ll be on maternity leave again in a few months, and my husband recently found out there’s a good chance he’ll be going on strike around the same time. There’s no way we can keep up with our mortgage payments, strata fees and bills on such drastically reduced household income. What can we do? ~Ratinder
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A: Facing a potential reduction in household income can be stressful. Whether it’s due to a strike, layoff, job loss, illness, parental leave, or any other reason, even if you’ve built up a degree of resilience and resourcefulness by living on a tight budget before, it doesn’t make the prospect any easier when the possibility arises again.
In situations like this, it becomes crucial to take proactive steps immediately to manage your finances effectively. Doing so can help you navigate these tough times with a greater sense of control, while minimizing your reliance on credit. Here are practical tips to get you started.
Protect your money with a budget
Find ways to increase your income
As you outline your reduced income spending plan, aim to balance your budget as best you can. It may become necessary to get creative with additional sources of income. Part-time work, monetizing a hobby or skill, freelance gigs, selling unused items, renting out part of your home, or taking in a boarder can all help you to make ends meet.
Using credit when faced with reduced income
When you’re facing a drastic reduction in household income, cutting your expenses drastically may not always be possible. If you find yourself needing to spend more money than you’re bringing in, using credit might become a necessary option. However, if you have an emergency fund, it’s wise to use that first and replenish it, along with other savings accounts, once your income is restored. Withdrawing from Registered Retirement Savings Plans (RRSPs) comes with tax implications, so consider cashing in your RRSPs only after other savings accounts have been depleted.
Dealing with debt when your income drops
Repaying debt while your income is lower than normal may not be feasible. While falling behind on payments can negatively impact your credit rating, it will recover once you’re back to work and can resume making the required payments. During times of reduced income, prioritizing your essential expenses and protecting your mental and emotional well-being is more important than maintaining your credit rating.
The bottom line on options to deal with reduced income
Scaling your lifestyle back to align your spending with a lower income level requires intentional planning. Hoping that you will naturally spend less without a concrete plan increases the likelihood that you’ll end up relying on credit to make ends meet. But avoid making too many drastic changes all at once. Give yourselves time to adjust and support each other through the ups and downs. Stay positive and flexible in your approach and adjust your budget as needed. By carefully considering all options and taking a balanced approach, you can better manage your finances during these challenging times.
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