How Much Could You Reduce Your Budget if You Get Laid Off?

by Darwin on February 1, 2010

In this economy, even if you think your job is safe, you’ve gotta at least have in the back of your mind, “What are some immediate steps we could take to dramatically reduce our monthly expenditures in the event of a layoff?”.  While many companies offer severance for several months, there’s no guarantee that you’ll land a new job with similar pay any time soon, or ever.  And many are not so lucky to be granted severance when being shown the door – consultants, blue collar, fired for cause, and many more (US Severance Packages are the worst amongst western nations).  When severance expires or that day comes where the pay stops cold, unemployment is unlikely to cover your old monthly income, but rather just a portion.  That leaves a gap between current income and future income.

Bridging the Gap

In order to bridge the gap that occurs between current income and future income to avoid cannibalizing personal savings, retirement savings, having to leave your home, etc., the first order of action should be to take dramatic action from a discretionary spending standpoint.  When considering our finances, I looked at various categories of spending that we could live without and how much we’d save per month by taking aggressive action:

Monthly Savings if Cutting Down to Bare Essentials:

Newspaper subscription  $31 -  We could totally do without.  I justify its existence since I read occasionally and the coupons we receive each week more than offset subscription.  But I could probably find replacement coupons with minimal effort on Coupons.com.

Coffee $50 – This is clearly a vice that I partake in because money isn’t tight right now.  If I’m dragging at the office, occasionally I’ll grab a latte, so yes, I’m guilty of the “latte factor” and I admit it.  However, on weekends and vacations I go without, so I take some solace in the notion that I’m not “addicted” and can quit if needed (do I sound like a recreational drug user?).  I save money on the morning cup by making at home and bringing in – buying twice in a day would be overboard for me.  Regardless, it would be easy to drop it if financial hardship occurred – especially the premium office purchase.

Phone/Internet/Cable $40 -  While I already save major bucks on my Comcast Bill (44% negotiated down!) and get all kinds of free premium channels etc due to the specific negotiation tactics I employ if I were laid off, we could quickly drop several additional services I am still paying for in some way.  The HD would go immediately.  The DVR?  Could probably do without – and cable could go down to the bare minimum.  I could probably drop another $40 or so without the premium stuff.

Lunches – $60 I generally eat lunch at my desk after buying from the company caf.  I spend about 6 bucks a day for a wrap and a drink or something.  If I weren’t working, I obviously wouldn’t be buying lunch everyday.  I could reasonably average out a lunch at $3 per day with larger prepared left-overs, salads, etc.  So, with a spread of $3 per day, that’s about $15 per week or $60 per month that I’m spending above baseline.

Eating Out $120 While we wouldn’t turn into hermits and forgo society altogether, we would certainly eat out less than the already paltry 2 times or so a month.  If it’s the 5 of us, we’re usually at a Friday’s or Friendly’s or something more affordable.  On the rare occasion my wife and I get out alone, we usually go somewhere a little nicer and easily drop $60-$100 with tip.

Entertainment/Movies $250 – Little gym, piano lessons, Adventure Guides, YMCA Activities, etc – $250 – While these activities enrich our childrens’ lives (and ours), during a pinch period, we’d have to sacrifice some of these costly activities and find other free/cheaper ways to give them a little something different.  I’m a big fan of spending our money on life experiences over material things kids tire of quickly, but for a period of several months to a year, this would also be a prudent area to focus on.

Dry Cleaning $40 - While I keep expenses down by wearing polo shirts instead of business shirts in the spring/summer/fall and yes, I’m guilty of the re-wear on the pants, dry-cleaning still adds up.  However, in this scenario, no job=no dry cleaning. For the one-offs that aren’t work related, we have a working iron.  We just don’t use it much now, but we could.

Vacation $200 – While we don’t vacation every month obviously, we do go on at least 2 vacations a year and at least one is usually a relatively pricey shore house or lake house we get at a discount from neighbors (which makes the value overwhelming since they’re beautiful houses and memorable vacations).  However, in the event of a layoff, it’s totally understandable to drop it down to 1 less expensive vacation. Spreading a few grand across a monthly allocation, we could easily drop an equivalent $200 out.

Groceries $100 - We spend a ton of money on food.  I don’t get it sometimes, but it’s with some coupons and timed shopping included.  But with much organic, growing children, a wife that loves to cook crazy meals, and with us entertaining friends and family somewhat regularly, we spend several hundred dollars per month on food.  We could easily chop $100 out of there by cutting some more corners and perhaps entertaining a bit less given the circumstances.

Gas $40 – Without a job to drive to daily, there would certainly be a lower gas expenditure.

Overall LifeStyle Adjustment $150 – Since I didn’t capture every possible category above, we could easily make some lifestyle changes if necessary – perhaps my wife doesn’t hit the Picture People for a portrait of the kids as often (albeit, she never does so without a steep coupon), we could do without the matching new holiday outfits for the boys, less toys, less mall, things that nickel and dime the budget each month that would be very easy to cut out if mandated.

Summary:

Total Budget Cut = $1081/Month

There are a few ways to look at this analysis.  For the extremo-frugals out there, you’re probably thinking, “Well, you could go without all this stuff now.  Just cut it out and stop living like a there’s no tomorrow!” On the other hand, there are those of you who would say even if laid off, you’d never do without some of life’s simple pleasures – after all, this is just a passing phase.  From my standpoint, this was really just a first pass to give me a rigor level 1 assessment of what kind of burn rate we’ve have if that day did come.  Would we need $3000 a month or live or $5000 a month?  I mean, this can have a huge impact on what size my emergency fund should be, whether I’d have to consider eating into retirement funds, whether we could continue to pay the mortgage indefinitely, etc.  With me at home, perhaps my wife could take up substitute teaching and tutoring since she was teaching before the kids as well.  We have options – but it’s always good to know where you stand.

What’s Your Analysis Look Like?

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{ 17 comments… read them below or add one }

1 Financial Samurai February 1, 2010 at 3:25 pm

Good question Darwin. $1,000 is a lot to cut out for the normal fella.

Hmmm… maybe $600-$1,000 for me. I live pretty frugally and save a large majority of my income, just in case.

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2 Craig February 1, 2010 at 4:04 pm

That sounds a little bit too high for the normal person. Maybe $500 a month, but little things like gym, netflix, are all part of your life. The reality is there isn’t too much significant things you can cut.

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3 Jim February 1, 2010 at 5:21 pm

I ran this exercise myself last spring. Our normal spending is about $4200/month including a $1200 mortgage. I figured we could cut about $1400 a month relatively easily if I got laid off. Most of the cuts would be in eating out, travel, gifts, entertainment. What I consider our discretionary, luxury spending categories.

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4 Darwin February 1, 2010 at 11:34 pm

Thanks Jim,
I was beginning to feel like a real spendthrift there for a moment! We live in a relatively high cost area, but being realistic, I think we should be able to reasonable shave out $1,000 or more with some necessary lifestyle adjustments.

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5 Kyle C. February 3, 2010 at 10:53 pm

I liked this exercise. You would be surprised at how much money you can really cut when you get down to it. The things that have to be paid are what matter, food, shelter, utilities. Everything else can go if you are struggling. I haven’t crunched the numbers but I am sure we could cut out at least $1,000 if not more.

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6 finance February 4, 2010 at 12:50 am

I’ve tried it and counted it again if really being strict I can cut-off around $1500 a month. It’s a good exercise to try and list it down.

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7 DreamChaser57 February 8, 2010 at 12:59 pm

Great post, I am a faithful GRS reader -and discovered your site from the blog carnival you participated in. I decided to review all of my 2010 budgets for discretionary fat. I was honestly a little astounded at the hundrends of dollars that discretionary spending took up, I also represented that figure as a percentage of our total net income. Some of the discretionary spending strongly correlated with our household values and other events – charity, church offerings, DH’s birthday, monthly get together with friends. Still, some of it was just lack of planning – running errands without eating before leaving home, or stopping by home to eat if we’re close by, not taking leftovers when possible, DH’s gym membership – he barely goes but it somehow represents a tangible piece of his committment to get fit.

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8 Lainey February 8, 2010 at 1:21 pm

Hmmm, good question. I don’t know that we could really cut much more out of the budget…maybe a bit in groceries and eating out, and spending. I’d say maybe $500, but that would be difficult and mean a fairly big lifestyle change.

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9 Nicole February 8, 2010 at 3:19 pm

I’d hope you’d still need to spend money on dry cleaning for all the interview suits you’d be going through!

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10 Lori February 8, 2010 at 5:01 pm

After losing a job making $58,000 and going six months before finding a new one at $50,000, I can tell you that trying to cut $600 in additional expenses out of a frugal single person budget is near impossible. I turned off DirecTV saving $30 (I already had the basic no-channels plan), turned off my home phone service saving $27, turned off DSL saving $43, and reduced my cell phone to 300 minutes for $30. I went with the new CLEAR Internet at their basic rate of $25/mo. Still with simple living expenses and a mortgage payment of $1400 on my 1500 sq ft house in Atlanta, my budget and reality are about $200 apart. I don’t have kids. I don’t have a husband. I don’t eat meat. I don’t buy expensive things. Unfortunately my savings is gone and I’m $10K in debt on lines of credit. Your article is clearly for folks who make more than $50K a year. It is hard to read and sad to note that those things you are having to cut have never been an expense of mine to cut. Since 6 months without a job is common, expect to blaze through $15,000 at $2500 a month. Save your money! Save! Save! Save!

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11 Darwin February 9, 2010 at 8:51 pm

Hi Lori,
Sorry to hear about your situation. I can empathize; we have friends who have gone through this recently and it’s gut-wrenching. In time, the economy will gradually improve and more opportunities will present themselves, but right now, people are in survival mode. You’ve taken aggressive action which is key.

Admittedly, we live in a high cost area and we do spend money on things that could easily be cut. (but we also put away for 529, IRA, 401K and have an emergency fund, so we’re not irresponsible – just not hardcore frugal either) – I’m not a fan of materialistic expenditures, but I find life experiences, especially for the kids, to be worthwhile. For instance, I have my oldest in piano lessons, we just took him skiing for the first time, and we’ll go see a magician or go to a Bounce place or whatever now and then – Dad&kid stuff. If we were struggling, we’d cut that stuff out. But these are life experiences we’ll cherish and hopefully mold him in to a well-rounded happy kid that spent a lot of time having fun with his parents. Time will tell. (We also spend a ton of time in the backyard, parks and other FREE stuff, but I like to mix it up and get him unique experiences that stand out).

Regarding who the article was tailored to, the concepts really apply to any budget. This exercise is scalable to $40K or $400K. Everyone should really be thinking about their fixed costs and what they’d sacrifice first. While the net savings will look different household to household, I think it’s helpful regardless.

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12 Crystal February 17, 2010 at 5:13 pm

This looks like fun and my husband and I were just talking about it yesterday! To put it in perspective, we take home about $5000 a month after taxes, 401k, insurance, etc.

First-to-Go Wave

Gas $40 – No more driving to work. :-)

Mortgage Overpayment $160 – We would only pay the $740 due instead of the $900 we’ve been paying.

Massage Envy Membership $49 – My husband loves it but agrees it would go first.

Vacation Account $250 – That’s how much we put in a month to take a couple of annual vacations.

Eating out $100 – We’ve only eat out a couple of times a week now and would cut that out. Last year it was 4-6 times a week, but we started cooking mainly at home in 2010.

Entertainment Expenses $50 – We don’t go to the movies or participate in many paid activities, so that’s as much as we could cut. We’d still hang with friends, have potlucks, and board game though.

“Fun” Money Allowance $150 – We each get $75 to just spend every month.

Biweekly Maid Service $90 – I love Jacquie and would invite her over for dinner, but we would have to cut this cost.

Newspaper subscription $6.50 – We pay $19.50 for 13 weeks of the Houston Chronicle…I use the coupons but we don’t need them. I’ll buy more from Angel Food Ministries.

Groceries $100 – We could cut back to $300 or less a month if we needed to.

That’s all we could cut and still be happy. That adds up to $995.50 and includes cutting back on our extra mortgage principal payments.

If we were about to starve, I’d stop contributing up to matching in my 401k and stop maxing out our Roth IRA to save $575 a month.

We could probably get rid of cable, internet, and our cell phones for a total of $160 a month…but it would be hard to get a job without the internet and a cell phone and I don’t want to live with my husband if he doesn’t have cable. :-)

I don’t feel bad about spending a little less than $1000 a month on “fun” expenses…that’s how we can stand to save 40%-45% of our total income for retirement, long-term savings, and financial opportunities like paying off our house in 10 years or less. :-)

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13 Earn Cash Now May 18, 2010 at 12:58 pm

There are so many ways that people can save money, but for some reason they think that life is over once they lose their job. They can easily buckle down and save some money, but are usually just to lazy to create a plan.

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14 fern June 20, 2010 at 3:40 pm

I’ve been out of work for 9 months now but thanks to my state’s generous unemployment benefits and my already frugal ways (plus some Census and freelance work), I’ve spent $0 out of pocket to date. (There’s also online surveys, from which I average $40 or $50 a month….tax-free…shhh.., enough to pay my water or sewer bill. I’ve been a guinea pig for medical research studies and done some market research studies. I’ve sold some gold jewelry to a jeweler and some unwanted household items on Craig’s List. I’m growing my own vegetable garden.)

When I lost my job, i immediately stopped my $425 monthly mortgage prepayments and of course my spending on entertainment, clothing and eating out (fast food only now) is minimal, altho I’d like to have the discipline to make it $0 as well. But I really needed a few new clothes, since I put on 15 pounds after losing the job.

I’m squeaking by, but obviously, this can’t go on much longer when i lose benefits and COBRA subsidy disappears.

I already have basic DSL and basic cable, both of which I could cut if I absolutely had to, and I’m ready to ditch my prepaid cell phone when I run out of minutes, plus my AAA membership since I’m not driving anywhere far.

Basically, all I spent money on regularly these days, aside from the mortgage and utilities, are gasoline, groceries and cat food. I’m single, and my bare bones expenses run about $2,000 to $2,500 a month.

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15 Fairrates lån July 6, 2010 at 3:33 am

I think aprox 40% of all expensis can be thrown away since we don´t need all these extra luxury items in our life.

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16 brendy g April 5, 2012 at 4:10 pm

Hi,
I will be facing a volontary departure from work/layoff. However I am extremely frugal and a single parent (son is 7 and going to private school). I do not foresee any problem with living with 50% my current income which would be around 25,000/yr. One because I already live with very little and save quite a bit. two because I will no longer have to pay babysitting if I am not working($1200.00/month) just because my actual schedule sucks for a single parent 2h-1000 pm.. Here is what I spend now without babysitting:
1- Rent $525.00 (Found the most inexpensive 2 bedroom dump made a deal with landlord, cleaned it put from my pocket $4500 on repairs to replace carpets,paint it, new flooring/2 windows replaced) but after 6+ years of living there I am recouping my losses,cause there is no way you will find a 2 bedroom apartment in Boston,MA for under 900 dollars.
2- Bills(cell phone/gas/electric) $ 150.00. No cable since 2005,no internet since I use the library which is free,
3- Groceries $200.00 … Well, will it surprise you if I tell you I use coupons/collect rebates/go to the farmers market and play the drugstore game.
4-529P for my son $150/month (Education is Highly important for me)
5- Ira $280(would bring it down when unemployed to 150 as well)
6-Health insurance $ 450.00 after layoff ( high deductible $2000/yr) for me and my son. Curently my employer pays quite a bit and COBRA would be around $700/month
7- savings $1500/month (child support + 10% of my salary)
8- Tuition for private school $500/month
9- Travel $ 100 (visits to my parents in NYC , will take the chinese bus from BOS $15 pp one way + subway passes ++++ one big trip a yr Europe/Africa/Asia/South America whatever..)
10- Charity $100 St Jude Research Hospital
11 Clothing + Shoes $ 20 month I use Goodwill/Salvation Army/ Gap/Old Navy cause I have the card that gives me rewards meaning free clothing… Son wears Uniform to school.

As you can see there is no entertainment budget..
1- Borrow books/movies, get passes for ZOO/Museums/Aquarium etc, from Library.
2-Swap books on paperbackswap.
3- Collect coca cola caps(I pick these up from the street or on trash day) for movie tickets/magazine subscriptions.
4- Recycle cans for pocket money for my son $40.00/month(gifts for birthday parties when he is invited,Skylanders, Game STOP/Target for games for his DS)
5-We eat out once a week in either one of his favorite fast food joints MCDonald’s,Burger King,Subway or whatever he wants is his pick, and that is covered on the grocery budget.

Life is not about buying stuff, is about feeling good with less, I use all the free resources I can find and more, and since I will not be working I already know how to obtain free tuition for my son at some private school. You would be surprised how people come to America with no papers and they get everything you and I should be getting but do not know how to..

In any case I have enough money saved to live for the next few years without working if necessary and if no big Emergency happens… God Willing!!

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17 Tony November 21, 2012 at 10:36 am

I agree. I cut out about $1000/month executing this same exercise. Our problem is living in highly taxed state (NJ). The property taxes are $1k a month, and until we move they will not go away!

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