No matter how perfect your budget, it can be thrown off by a loss of income, whether that takes the form of a pay cut, a layoff, or poor health. Too many people wait to consider their plan for these scenarios until they’ve already happened. But there is so much more you can do to prepare if you start when your income is stable.
What elements make up a good loss of income plan? The more safety nets you construct for yourself, the better you’ll be protected if you lose your income.

Savings
The most obvious protection for any kind of crisis is money. The more you have saved, the better you’ll weather anything that happens, from a car breakdown to a natural disaster. That holds true for a loss of income as well. Experts say you should save for three to six months of expenses. This amount can vary some depending on what your expenses are. For instance, if your budget includes a lot of discretionary spending and investing, you can assume you could cut those items during a period of unemployment. But make sure every regular expense, whether bills or normal household shopping, is covered in your emergency fund.
Where should you keep your emergency fund? An interest-bearing account is best, but it also needs to be accessible. Savings above your emergency fund amount can go in CDs or other longer-term accounts, but your emergency fund should be accessible immediately without penalty. A high-yield savings account is a good choice if you can find one.
You can use the same emergency savings account both for emergency purchases and loss of income planning. But if you use that fund for an emergency expense, such as car repairs or medical bills, replenish it as soon as possible. Troubles, as Shakespeare said, “come not single spies but in battalions.” There’s no guarantee a job loss won’t happen immediately after your car breaks down. Unfortunately, life doesn’t cut you a break because you already had some bad luck.
Consider Your Assets
Beyond your emergency fund, you may have other assets you can draw on if you need them. Make a list of assets you have and prioritize them based on which you would want to use first. Many assets come with a downside if you use them in an emergency. For instance, CDs come with a penalty if you withdraw them before their term is up. You can withdraw from a retirement fund in an emergency, but you will pay a penalty for that too.
Or you could consider borrowing. What credit sources are open to you? Credit cards come with high interest rates, so this shouldn’t be your first fallback in an emergency. A home equity line of credit or home equity loan will generally have much more favorable rates.
Don’t make borrowing from friends or family part of your loss of income plan unless you’ve asked them first. If you rely on their help and it turns out they’re unwilling to give it, you’ll need to explore other options in a hurry.
Insurance
Depending on the reason for your loss of income, insurance can help. First off is unemployment insurance, which is a government program. Most employees pay into it through paycheck deductions. However, each state has its own requirements. You will have to have a valid reason for leaving your job, such as a layoff or firing without cause. And you may need to prove that you are searching for another job.
Disability insurance protects you from a loss of income due to your health. You might have coverage through your employer or purchase a policy of your own. There are short-term and long-term policies, depending on how long you are unable to work. Carrying a policy like this is an important part of your loss of income plan, especially if you are the sole breadwinner of your family.
Although federal disability benefits do exist in the form of Social Security, it can take years to qualify for these programs. So your loss of income plan should not rely on these programs in the short term.
Create a Loss of Income Plan
Don’t wait for a crisis to prepare yourself. Create a plan for what you would do if you lost your income, and start building your emergency fund. A financial advisor can help you put a plan together and advise you on which assets you can most easily access. To meet the advisor who can help you, contact us today. We will listen to your needs and match you with a qualified advisor.