How can I prepare for a drop in family income

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Answered by: Yvonne, An Expert in the Frugal Living - General Category
A family's income may drop for any number of reasons. A redundancy may lead to long-term unemployment or divorce may result in a dip in earnings. Whatever the reason, it's normal to feel worried, angry or down when there is a drop in family income. It's also normal to keep spending as if your income hasn't changed - until you face a serious financial crisis. There are steps you can take to adjust to your new circumstances before you get into trouble.

Firstly, look at your lifestyle and spending habits. When you experience a drop in family income, it's important to recognise that your life has changed and that you and your family will have to adjust to new spending habits and new expectations. The sooner you do this, the more control you will have over your financial situation and your life. Take control of your situation as soon as possible by putting a halt to unnecessary spending. It's normal to want to keep up familiar spending patterns to maintain the standard of living you are used to - by using credit cards or dipping into savings to get by. This will soon lead to financial trouble. By the time many people adjust their buying habits to reflect their new financial circumstances they are often in serious debt.

Stop using your credit cards. Credit cards allow you to spend money you don't really have, at interest rates that make this among the most expensive form of borrowing. Avoid adding any unnecessary purchases to your credit cards. Put your credit cards away in a drawer or cut them up if you find you can't control credit card spending.

Reduce your credit card debt each month. Work towards paying them off one at a time. If you have one card with a very high interest rate, make the largest payments to that one every month until you pay it off. If the rates are about the same, make larger payments to the one with the lowest balance. You will feel better when you have paid off the balance and retired the first card. Then start working on the next one.

Track your spending. Most people have no idea how much money they spend in a day, a week, or a month especially when the money is there to cover the expenses that may not matter. When your income drops and money gets tighter, it becomes very important to know where your money is going. It's often the cash spending - for coffee, meals out, cinema, and other extras that throw a budget out of balance. A simple way to understand your spending is to carry a notebook with you for two weeks and record every cash purchase. (One week is often not enough to get a complete picture, and a month is too much work for many people.) At the end of those two weeks, you should have a good idea of which expenses can be cut out or reduced.

The sooner you and your family change your spending habits, the easier it will be to find ways to live within your means. If you wait, you may get yourself into financial trouble that will make it much harder to get your budget to balance. Use this change as an opportunity to take charge of your finances so that you feel in control of your life. In time, you will learn to spend less and live well.

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