Financial Fire Drill

DH is worried about losing his job so we did a financial fire drill last weekend.  Once you include all our annual expenses we’re living on more than just my take-home pay.

We talked about ways we could cut if we needed to.  Sadly most of the ways are not very financially healthy for the long-term or for our souls.  Here’s the break-down:

Reduce/stop charity expenditures
stop pre-paying mortgage
un-Drip investments

change vets
fewer disks on netflix
target lawn watering and reduce sprinkler use
increase home energy efficiency (recaulk)
reduce book buying
shop insurance

reduce eating out/costs of eating out
reduce costs for grocery shopping

Most of these are not very satisfying.  We’re taking money that used to go to savings and redirecting it to spending.  We’re taking money that used to go to charity and redirecting it to spending.

On the one hand, it is ridiculous that we cannot live on my salary alone.  We lived in an incredibly expensive coastal city on 36K-40somethingK/year for several years and managed to pay off debt and save up for a house downpayment.  Some expenses that came with having a child we can’t really get around– childcare, increased insurance costs etc.  But that isn’t enough to be the difference between my current salary and our combined graduate salaries.  Not even if you add in our increased marginal tax rate.

On the other hand, to really cut down on these expenses we would have to spend time, which is precious, and worry about money, which I really enjoy not having to do.  We worked really hard and made specific choices to get to this point in our financial life.  I don’t WANT to go back to worrying about every dime, or freaking out whenever we have an unexpected major expense.  DH likes being able to take things to goodwill instead of selling them on e-bay.  These are things we could do if we had to, but we don’t have to (yet).  We’re spending for the increased peace of mind.

If we really want to cut our expenses we need to focus on our food bills.  Food is our major expense.  We eat out about once a week, but when we eat out, we don’t hold back.  We could go back to looking at prices on the menus instead of just ordering what we want.  We can skip some combination of appetizers, main meals, and/or desserts.  We could not get the fresh squeezed lemonade.  (But I LIKE fresh squeezed lemonade.)  We could order more pizza instead of going out.

In terms of grocery shopping, my expensive cheese habit would probably have to go. The big thing we would need to do would be to better time our purchases to take advantage of sales. I like the freedom of not doing that now, not keeping in my head what things generally cost.

Right now we don’t actually HAVE to make any changes (we’re saving more than half our total income, just not living off my take-home pay anymore), but we might have to make bigger changes in the future.

The big question is how much of this should we be doing now. We’re already pretty good on many things. Purchases of durables and non-durables, gasoline costs, even eating out. We probably could use an energy audit as the house has gotten leaky since we moved here. We’ve gone through most of our regular bills and bargained them down, but not the insurance. I just don’t know if it’s worth our time to buckle down now instead of later. Probably not…

Also… I want a raise.

Have you done a financial fire drill?  What are the first things that come to mind that you could cut in the event of a job loss?

56 Responses to “Financial Fire Drill”

  1. Comrade PhysioProf Says:

    I know we’ve talked about this before, but I really still do not understand why you insist on prepaying your mortgage. For an individual borrower, a mortgage is the cheapest money you can get, and the interest is deductible from your federal taxes. To forgo current use of your money to prepay a mortgage is crazy.

    • nicoleandmaggie Says:

      Didn’t we address this just last week?

      Mainly we’re doing it for diversification. We’re maxing out our 403(b)s, aren’t IRA eligible (we might be Roth eligible this year since I didn’t get any summer money grants), put a hefty amount in 529 each month, and have a good chunk of money in the stock market in non-tax preferred funds. Our savings accounts pay only 0.55% and I’m tired of chasing better rates because they always fade away. The interest rate on our mortgage is 4.75% (effective rate closer to 4%), we’re still paying quite a bit of that in interest each month and the return is better on the mortgage than in savings. It is a form of safe investment… debt that has to be paid off no matter what the stock market does, and it is currently paying better than any other safe investment. When interest rates go up, we’ll stop and take advantage of the cheap money, but for now we’re doing better with the money going towards principal than towards other safe investments, which are paying next to nothing.

      • Z Says:

        I prepay mine because I think the housing market is going to fall. I want to hit that principal down.

  2. m4891 Says:

    One thing that I didn’t see is leveraging the time of the unemployed person. Take childcare: you pay for care (in part) so that both of you can work full time. In the event of unemployment, maybe the hours of childcare required could be reduced, and the unemployed spouse can take on some of the socialization/supervision duties? Or for eating out: if the unemployed spouse is willing to take on the challenge of gourmet cooking, the entire family can easily enjoy the same quality of cuisine for the price of one person dining out.

    Basically, if your time is/was valuable to an employer, it is also valuable to the household.

    Btw, I love that you have a category “woe”. cheers!

    • nicoleandmaggie Says:

      Those are really good points for many families facing a job loss situation.

      For us, soon childcare will be private school (long story, but basically we can’t switch to public for at least 2 years), so that can’t actually be leveraged. Plus, if DH loses his job, he won’t be able to be a stay at home parent… he will keep active professionally but not at a steady or guaranteed pay. It is true that timing grocery sales etc. would fall on him and it wouldn’t be as difficult time-wise to do that.

  3. Cloud Says:

    I recently had a 4 month period of no work. We kept the kids in day care- the continuity is better for them, and I needed time to job search. However, we did cancel the cleaning service and I watched our grocery budget more than usual.

    We also stopped prepaying our mortgage. We prepay because we want to get back out from being underwater- the value of our house fell after we bought it. We want to have the flexibility of being able to move if necessary.

    I work in biotech, and layoffs are fairly common- this is the second time I’ve been laid off, and the 6th round of layoffs I’ve witnessed. But we also live in an expensive coastal city- once we decided that we wanted to buy a house and have a second kid, it wasn’t practical to try to keep our expenses down to something that could be paid on only one salary. We would have had to move far, far away from our jobs, and that bothers us from both an environmental and time management stand point. So we keep a hefty buffer in our savings account. Between that and the severance pay, we had about a year before we would have really needed to start economizing. That buffer was hard to build up, but oh so worth it.

    • nicoleandmaggie Says:

      Emergency savings are so important. The worry here is that we’re not in an expensive coastal city with a lot of job opportunities for DH… so we might have to move completely or we might stay with me with a regular job and him doing long-distance contract work. There’s a lot of uncertainty. I did calculate that we would only need 120K/year to live happily in the SF Bay area (renting, of course). :)

  4. Comrade PhysioProf Says:

    That all makes sense in terms of comparing what to do with savings. My point is it makes no sense to forgo *spending* money on stuff you want and can use now to prepay a mortgage. Well, actually I guess it does make sense if you prioritize saving over spending, so yeah.

    • nicoleandmaggie Says:

      Right now we have extra cash and we’re untenured, so bulking up savings for an uncertain future (also making up for lost savings from those years in graduate school) makes sense. We may loosen up when we have more certainty… But, our dream goal would be a small house in the SF Bay area, and we don’t have anywhere near enough money for that.

      Still, if we lost income we would definitely have to cut mortgage pre-payment. If we were spending that instead of saving it, it would hurt a lot more to cut the spending. We won’t really feel the mortgage pre-payment being stopped, except when I write out the monthly check.

  5. First Gen American Says:

    We could do it but I couldn’t have said that 2.5 years ago. We’ve been working to reduce our fixed expenses like gangbusters. Thank god that if we were impacted now, the main things that would suffer is retirement savings and maybe the vacation budget.

    If one of us stopped working for a while, then I’d have to stop daycare..that’s still my biggest monthly household expense, even with one in public school.

  6. Denise @ The Single Saver Says:

    I think that prepaying the mortgage is a great idea, if you have the extra money to do it. But as soon as you don’t, it makes sense to cut that out. I also think you could look at a list of ‘necessities’ in your life that you might as well enjoy now but as soon as a job loss occurs they get cut – like cable, Netflix, fancy cell phone plans, eating out, etc. Enjoy them now, but know in the back of your mind that they are NOT necessary and can be cut out if you can no longer afford them.

    • nicoleandmaggie Says:

      You’re absolutely right. A lot of those things we actually don’t have… no cable, only basic cell, vacations to visit family only…

      We do eat out but about once a week. It would be sad to get rid of my fancy cheese habit. But I really don’t want to give it up now!

  7. Spanish Prof Says:

    Well, I am the income provider of the family, and my husband is a freelancer. We don’t want kids, so I don’t worry that he only makes 10% of what I do. So I guess I can’t really do your exercise. Although we’ve been wanting to go to Europe for a while, now. We could cut down on going out to be able to save for it, but I wonder if one year of drinking cheap beer once a week is worth 2 weeks in Europe.

  8. frugalscholar Says:

    ergh. My comment disappeared! Why?

    Short version–We paid off our mortgage early also. We thought of it like a bond! Once the house was paid off, our expenses plummeted.

    Could you pay the house off out of savings? Ridiculous to most, but that is what I would try to do.

    • nicoleandmaggie Says:

      I don’t know why your comment disappeared! It isn’t in the spam filter. :( I hope WordPress isn’t having the kind of problems blogspot has been having.

      We don’t have enough in savings to fully pay off the house unless we wanted to tap retirement funds (which we don’t). We do need the cash to be liquid. Our escrow is still a full third of our mortgage payment, so we would still be on the hook for a pretty large annual payment if we didn’t want to lose the house (as we discussed last Sunday).

  9. Jennifer Says:

    You might want to look at recasting your mortgage. You could continue to make the pre-payments but if you need to cut expenses the payment after recasting will be less than you are paying now. We recast recently and did not have to give additional principal upfront as our bank gave us credit for the amount we had already prepaid. Just a thought.

  10. MutantSupermodel Says:

    You know I’ve been *living* the financial fire drill for a while– loss or drop in income. It’s getting better little by little though and it’s SO much more relaxing. I’ve been so depressed and I think it’s all the money stress just breaking me down. It’s going to be nice when the income stabilizes and it’s going to be nicer when my debt is paid off.

    BTW I dream of retiring in the Bay Area. I lived in Berkeley one year and fell head over heels in love.

    • nicoleandmaggie Says:

      You’re awesome!!

      I’m not actually that crazy about Berkeley… not sure why not.

      • Z Says:

        Because it is like Austin and from what I have been able to gather, Boulder and Madison … insular. But if you’re not from there, it has certain wonders which are fresh, and you can fall in love, yes.

      • MutantSupermodel Says:

        Well it wasn’t just Berkeley, it was the Bay Area in general. I had no car that year. Walked and BARTed everywhere. People were friendly. It’s a gorgeous part of town. *sigh*

      • nicoleandmaggie Says:

        I LOVE the SF bay area. Just not Berkeley so much. I think it reminds me of Boston too much or something.

  11. Donna Freedman Says:

    Financial fire drill — hey, I did one of those! (Thanks for the link.)
    It would currently cost me about $1,220. Of that, $700 is rent and $349 is health insurance. :-(

  12. KH Says:

    I like the idea of a financial fire drill.

    I think were I to lose my job, there is quite a bit I could cut – down to the bone, truthfully – and reduce expenses. However, it’s a little tricky for me because I have a housemate/ex-husband and we’d have to negotiate some things. Like right now he pays the electric bill (which is staggering in the summer in the South) and I pay the cable. It evens out. I would be ok with cutting cable entirely and just using Netflix, but I’m not sure he would. And then if I did cut the cable, it wouldn’t be fair to him to keep paying the whole electric bill when I’ve dropped one of my “equal” expenses. Obviously he wouldn’t want me to go into debt just so he could watch Game of Thrones on HBO, but we would definitely have to renegotiate bills. And if he decided he couldn’t live w/out cable, then I’d feel guilty watching it while he paid and I mooched. :) (I know that’s not entirely rational, but there you have it.)

    I think in my situation a fire-drill would involve a LOT more than just figuring out where to cut things out. But wow .. now you’ve got me thinking. Hm.

  13. Sandy H Says:

    I’ve been thinking about this a lot lately actually. I have a post drafted about the outsourcing situation at my job. And as much as I hate to admit it, I could very easily be out of a job by September or October.
    I crunch the numbers almost weekly. I also have what my severance would be if I were to get it now- and I’ve tried to figure out if it would be better to eliminate debt with it or hold it for the long run.
    Unfortunately, the economy is still in the toilet and finding a job is hard! It is an unpleasant thing to think about, BUT it is like a fire drill- you have to be prepared financially in case something does happen.

    Good luck to you and your husband. Even the thought of perhaps losing a job is incredibly stressful. Lots of sleepless nights and worrying. My husband is NOT a worrier. He just deals with things as they come up.

  14. eemusings Says:

    We’d cut pay TV (even though it’s cheap entertainment with our movies package…), not go out to eat at all I guess, and maybe shave our car insurance to basic. I don’t really think we could cut groceries any more (maybe $10 a week?). T’s fun money would have to be slashed. That’s really about it – we don’t do a lot of regular discretionary spending.

  15. bogart Says:

    Ooh, interesting. Let’s see …

    We did a bit of a pre-financial-firedrill shortly before my DH retired, refinancing a ~5% 15-yr fixed to a 30-year 4.5 yr fixed. Obviously the value of this is debatable (I know you’re taking a different approach), but it keeps our housing expenses quite low and we’re well away from being underwater (~40% equity/60% mortgage).

    DH is retired; it’s very unlikely his income will ever go away completely (pension) though in the long run, inflation may destroy it (some COLAs, but…). Still, if I lost my job tomorrow we’d both be out of the workforce yet still have (not counting unemployment, savings, etc.) enough to cover our mortgage, health insurance, car payment, and utilities coming in each month. Plus we could have 2 people looking for a job immediately, of course.

    We make minimal use of paid childcare (16 hours/week) but I think it’s really crucial to DS as an opportunity to interact with other kids and adults. In a pinch it could go, but it would be farther down my list than some other things.

    I’ve got 3 different life insurance policies on me taken out at different times for different reasons, and have considered dropping 1, but doing so would save only ~$20/month. Eventually I’ll do so, but for now (that one is not level term as my other, larger one is), it’s fairly cheap, and if I did lose my job I’d also my *really* cheap policy, so for now, I’ll keep it.

    Our food expenses could definitely go down if we were out of the workforce. DH isn’t organized about sales, etc., and I find it hard to fit into my schedule but not working would change that. I’d also save the ~250/month I pay in gas to get to/from work.

    DH could give up his golf course membership — a luxury, obviously, but hardly an extravagance; at the frequency at which he plays it works out to … hmmm, math … a little more than $15 per round of golf (or slightly less than $4 per hour of entertainment), and he typically walks the course, so it also counts as exercise.

    Losing my income would obliterate our contributions to retirement savings (those come 100% from my income); OTOH, if we assume my paycheck continues yet we need for some reason to have me eeking out more take-home pay, my employer contributes about 10% of my gross each month no matter what I do (even if I contribute nothing). So even that’s not a horrid disaster, though certainly not ideal.

    We could certainly sell our not-paid-off vehicle and our (used, not worth big $$$) camper, though I anticipate continuing to use both for many years and would be bummed to need to do so (understatement).

  16. Jacq Says:

    I’d probably meet in the middle – cut back 50% of discretionary costs and bust my brains to figure out a way to pay for that 50%. But there’s loads of things I think I’d like to do just for fun and a different experience for awhile.

  17. oilandgarlic Says:

    It’s hard to think of a financial fire drill when you’re already frugal, but lately we have been spending more because we’re valuing time over money.

    In a pinch, it would be cut childcare, lunches/food, cable, auto insurance (increase deductible), and look at all fixed recurring expenses.

    Finances are so on my mind right now and I need to devote an entire new post about this soon…

    • nicoleandmaggie Says:

      Yeah, cut cable… um… we don’t have it.

      Which is why it’s kind of ridiculous that we do spend so much money. Obviously we have places to cut, but it’s mostly edible luxuries and time.

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  19. bardiac Says:

    My state government is planning to effectively cut our pay by almost 10%, starting as soon as they can. As a single person living on one income, it doesn’t make me hopeful. But at least I don’t have kids I’m trying to raise on this income (on the other hand, I also haven’t gotten the up to $9k in untaxed benefits that people who have kids on health insurance get; they’ll be losing some of that benefit, too).

    • nicoleandmaggie Says:

      That really really sucks. We have also not been getting raises while our benefit costs have been increasing. But so far no furloughs. That is horrible.

    • Sandy H Says:

      Paycuts are terrible… My company entered a 5 year plan, where we (their wonderful employees) take a 5% paycut EVERY YEAR. We are in year 2, and I’m not sure how much longer we can make it.
      However, we are facing layoffs so I may now be taking a 100% paycut instead of a 5% pay cut (well, roughly 10% now, and eventually 100%).
      In that light- a 5% pay cut every year to adjust is almost awesome. :-(

  20. Debbie M Says:

    I haven’t done such a fire drill in a while. Normally between roommates I:
    *Stop all charity payments
    *Stop all retirement contributes
    *Stop all other savings
    *Use less air conditioning or heat

    I usually get a new roommate pretty quickly, so I can usually catch up on the charity and savings, but I do all that to maximize my cash flow just in case I don’t. (You could also start doing this sort of thing now, and then if the job-fear passed, you could catch up again, too.)

    I’ve had the same roommate for 11 years now, and am about to pay off my mortgage. But if I lost my job I could also:
    *Cancel Netflix
    *Drop my phone landline
    *Drop my internet (ow)
    *Stop eating out and focus on low-cost cooking
    *Stop taking ballroom dance lessons
    *Start tutoring
    *Look for part-time work until I got a better job
    Heh, my friends are rich enough now, I could probably do odd jobs for them for cheap

    If things got bad I could:
    *Sell my car
    *Sell my house and move into an apartment
    *Cash out my IRA
    Oh, another thing I’ve done in the past is move back in with my parents, and that’s actually still an option. In fact, both of my siblings are living there right now! Even more desperate strategies include dumpster diving and homelessness.

    Of your other suggestions, I’m already down to 1 movie at a time on Netflix, I don’t have any pets, I don’t water the lawn (I have only native plants there), I’ve already weatherized my house, I already buy only a couple of movies and books a year and, oh, right, insurance. I could cut collision insurance on my car (though it’s still rather new, it’s paid off). Wow, health insurance—it’s been a long time since I’ve gone without. (After grad school, my roommate and I joked that if we were in a really bad accident, we might look down at ourselves, realize we couldn’t afford treatment, and end up fighting with an ambulance worker over a piece of glass to slit our throat with. It’s a really horrible joke, though.) I’d definitely look for a high-deductable sort (and/or something associated with a professional organization) so it would be cheaper than that thing where you get to keep your same work insurance for a while for a huge price. I actually know someone people who got into a marriage of convenience for the cheap insurance, though it’s hard to imagine doing so myself. Actually, I do know some single guys with jobs. Oy.

    Okay, back to things you would actually try, remember that it’s not for the rest of your life (probably). Things are a lot easier to bear when you know they’re temporary. And with the food, you could always decide to buy only low-priced nutritional things except for $X amount for luxuries (like yummy cheese).

  21. hush Says:

    I’m already a tightwad who naturally does the little moneysaving things like shop at thrift stores, read only library books, and bargain ferociously. We are blessed and cursed with self-employment and entrepreneurship, so there is no one with the authority to “fire” us per se. We can certainly lose business, lose a license, or get hit by a bus though (pleasant thought.)

    The first drastic cuts would be something like saying goodbye to:
    Childcare, kid activities, buying clothes, lawn service, gym membership, the used car we just bought, vacations, paid TV/movie services, country club membership, our small wine collection, and eating out. But then, would life really be worth living anymore? (I kid!)

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