How would you survive if you suddenly lost your job or were faced with a significant pay cut? These tips from financial planner Marc S. Freedman can help you be prepared.
Step 1: Build a net worth statement. This is an assessment of everything you own minus what you owe. For example, if you have $100,000 in assets but owe $80,000 in debt, your net worth is $20,000. Use this calculator to determine your net worth.
Step 2: Understand your cash flow. Simply put, this is how much money you make compared with how much you spend. This step is vital but often the hardest, Freedman says.
To determine your cash flow, add your guaranteed sources of income (salary, severance pay, spouse’s income and so forth). Subtract essential and fixed expenses (mortgage/rent, utilities, food and so forth); everything else is considered discretionary spending — in other words, things you can live without.
Bank statements offer great insight into spending habits. They can also determine what you can cut from your monthly expenses. Freedman says building a spreadsheet to see how you’ve spent money in the past year is also helpful. Here are some other tips to improve cash flow.
Step 3: Indentify an emergency fund. This should be at least three to six months of your fixed expenses.
Step 4: Understand your income needs. If you find the job you love, make sure it doesn’t drain you financially. Freedman says calculate your monthly expenses and multiply that figure by 12. Take that number and inflate it by 20 percent. This will give you an idea of how much money you need to earn to cover your basic expenses.
“If that number come out to $40,000, but your current employment is only going to provide $20,000, you have to either reevaluate your expenses or ask if this is the career you want to pursue,” Freedman adds.
Step 5: Determine what’s important. Take a look at your total financial picture. Compare resources and expenses with the potential income from your new career. Will it allow you to save money for the future? As Freedman points out, your paychecks will stop at some point.
“If you find your dream job and money isn’t a part of it, you have two choices,” Freedman says. “You can either change your spending lifestyle so you can go after your dream, or look at your current financial situation and ask, ‘Was I prudent and did I put adequate dollars aside?’ ”
Latisha R. Gray is a freelance web producer and writer based in Washington, D.C.