By Dorothy Rosen 
 

Unemployment is higher than it’s been in over 25 years, home values have plummeted and easy credit is a thing of the past. If you’re still living from paycheck to paycheck, you could be one paycheck away from a perfect financial storm.

There are few among us who will cruise through life without ever getting laid off, fired, downsized, or eased out of a job. Even if you work for yourself, there’s always the threat of your business going belly up should market forces change or the overall economy hit a brick wall.  

Assume your number will come up one day, and think about how you are going to pay the bills when it does. A gentle reminder: not paying your bills on time can sully your credit report for seven years; a bankruptcy will have you wearing the crown of “deadbeat” for a decade.

Tip: More and more employers are including credit checks in their background screening, and more and more otherwise qualified job candidates are being knocked out of the box because of bad credit scores.

Landing a decent paying job is hard enough in tough times; a nasty credit report can make it close to impossible. 
 

The best defense is a good offense

Tip: The smart money takes a piece of every paycheck and tucks it away so when there is no paycheck coming in, they can pay their bills without having to beg, borrow or steal from their kid’s accounts. 

Unless you’re hooked on drama and anxiety pills, it’s time to get serious about creating a Loss-of-Income Fund. Here is a step-by-step plan to help you set the savings goal for the fund. 

1. Clear off the table, roll up your sleeves, and brew yourself a pot of strong coffee. 
    
2. Fire up your computer, pull up your money-management program and print out your spending history for the past 12 months. If you don’t use the computer to track your spending, resurrect your credit card statements, cancelled checks, loan statements, and any other documents that relate to spending or borrowing for the past 12 months. (Then, send a letter to Santa asking him to stuff a box of Quicken or Microsoft Money in your stocking this year.)  
    
3. Extract the bare-bones living expenses from your spending and borrowing records. Don’t forget to pick up minimum credit card payments and intermittent expenses, such as car insurance. Ignore vacations, entertainment and fancy shoes; they are non-essentials and don’t belong on the bare-bones list.  
    
4. Total your bare-bones living expenses and divide by 12. That is your current monthly survival amount.  
    
5. To compute your out-of-work survival amount, add whatever you would have to lay out for COBRA or other health insurance each month.  
    
6. Estimate how much you would receive in unemployment compensation each month. You can get this information from your State Unemployment Office, either online or with a phone call.  
    
7. Subtract the unemployment compensation amount from your out-of-work survival amount to arrive at the “monthly shortfall” you would have to cover if you lost your job.  
    
8. Estimate how many months it will take to find another job. If you’re not sure, use 9 months. (If you’re retired, use 24 months).  
    
9. Use the following formula to compute the savings goal for your Loss-of-Income Fund:

                        Number of Months x “Monthly Shortfall” = Loss-of-Income Savings Goal 
 

Here is a hypothetical example of how you would use the formula to compute your Loss-of-Income Savings Goal:  

1. Period of unemployment: 9 months
2. Current survival amount: $4,000
3. COBRA expense: $500
4. Unemployment compensation income: $1,500
5. “Monthly shortfall: $3,000 = ($4,000 + $500 - $1,500) 
    

                                      9 x $3,000 = $27,000 
 

• If your Loss-of-Income savings goal looks more challenging than you expected, don’t throw in the towel; it doesn’t have to happen overnight, and you don’t have to do it alone. 
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Enlist the help of your spouse and children to set up a timeline and brainstorm ideas to get the job done.

 

• If your savings goal looks unreasonable, accept the number as a revelation that you may be living beyond your means, and deal with it.

• If your goal is seriously over the top, clipping coupons and brown bag lunches won’t cut it. Start looking at a major lifestyle adjustment.
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Tip:  Others have run this course, and made it to the finish line.  If you take some time to think about the numbers and define the problems, before you know it, your brain will be kicking out solutions like its David Beckham on a roll.