How to Protect Yourself From a No Income Situation

income protection

This is a guest post by Justin from Life Insurance Finder

As you go about building assets such as a home, stocks and investment properties, it can be a shock to learn that your greatest asset is none of these things. Your greatest asset isn’t a material possession you already have or one you can build or buy, instead your greatest asset is your ability to earn an income. Money is the easiest thing in the world to come by when you are able to go back to work and earn more. Think about it – when you are able to earn money you have the power and freedom to control how you live your life, and if you want more out of life, more holidays, more houses, then you simply earn more money.

However, what would happen to your lifestyle if you were suddenly unable to earn an income. Imagine how your family would cope without your wage, how would you pay the bills, how would you put food on the table? You probably have provisions in place to look after the other assets in your life, for example home and car insurance, a will and guardians for your children – but what are you doing to protect your greatest asset, your income?

Following are the top three ways you can protect yourself from being in a situation with no income, and they are simple steps you can take for your peace of mind.

Manage your finances

When you find yourself in a no income situation, the first thing you will likely do is start prioritising your bills, and deciding which ones you will pay with your quickly diminishing funds, and which ones can wait. However, it is the way you determine these priorities which is important, because while you may have mortgage, car, power and phone at the top of your list to help maintain a secure home for your family, avoiding bills such as the credit card can actually do more damage. For example, if you fail to make your credit card repayments and begin to default, this will be entered into your credit report. Then, when circumstances do recover and you go for a loan, a credit card and in some cases even a job, your poor credit rating can begin to hold you back.

Therefore, it is important to manage your finances now to avoid a no income situation turning into a personal financial disaster. This means:

  • Looking at your budget. Make a list of all of your monthly expenses and bills, and look at how much money is left from your income each month after paying all of these. You may find that you come up with a negative number which means you are spending more than you earn and relying on credit cards. Luckily, the first step to living within your means and developing financial stability for any situation is knowing all of the facts, so it is important to regularly check and update your budget throughout the month. With all of your expenses listed out each month, a budget is also an important tool for helping you curb your spending.
  • Reduce your spending. Look at the lifestyle you are living and what is really important to you. Was it really necessary to charge that manicure to your credit card or spend hundreds of dollars at the pub each week? To protect yourself and your family from financial disaster in case the worst were to happen you need to build a strong financial foundation of responsible spending, budgeting and saving habits.
  • Manage your debts. If you were suddenly in a no income situation you will have enough bills to worry about without having to make your credit card repayments. Therefore, get your debts under control now while you have a steady income, by cutting back on some discretionary spending and making higher repayments on your debts. You may even need to start looking at getting a part time job, or selling unwanted (or unnecessary) items to raise some extra cash to conquer your debts.

Emergency fund

Being in a no income situation is exactly the emergency that an emergency fund is designed to help you manage, and you can use these tips to build and use your emergency fund to the greatest benefit:

  • Know an emergency. An emergency fund is designed to be an easily accessible source of funds if you are suddenly unable to work, or you need to cover unexpected expenses quickly. Having an emergency fund allows you to keep living without an income and without running up high credit card debts until you can find another job or return to work. That is why it is important to protect your emergency fund, rather than dipping into it for a faux emergency – it is not an emergency when you see a shoe sale, when friends unexpectedly invite you on holiday or you need to install bigger speakers in your car.
  • Have a healthy sized emergency fund. When an emergency situation arises you never know where it will come from or how long it will last, so you want your emergency fund to be as big as possible. So to give you a figure to aim for, you want to build an emergency fund with enough money to cover between three and six months worth of bills and living expenses. This should give you plenty of time to find a new job and you don’t have to feel pressured into taking a job which isn’t right for you. Of course the amount you have in your emergency fund should also depend on your situation and level of risk, for example do you have children and want to create an even bigger buffer as extra protection for them, or do you and your partner both work for the same company where both your jobs could be at risk at the same time if the company was in trouble?
  • Start saving. Three to six months worth of expenses can be a daunting savings goal, but the best way to achieve it is to just start. Open a high interest online savings account and set up a regular deposit from your transaction account each pay day. Even if you just start with a $10 or $20 deposit each week, the savings will quickly add up, compounded by your interest rate. Because you are paying yourself first you won’t notice the money leaving your account, and you can gradually increase the contributions each month until you have a healthy emergency fund.
  • Safe emergency fund. When you are choosing a high interest savings account, look for one which is easy and affordable to use. Choosing an online account means you can usually avoid all transaction fees, monthly fees and application fees, making the account completely free.  Also shop around for the account with the highest ongoing interest rate, and don’t be distracted by a high promotional rate which reverts to a much lower rate in a few months time, because you are looking for a long term emergency fund solution.

Income protection insurance

The final way you can protect yourself from a no income situation is by taking out an income protection insurance policy. Income protection insurance is sometimes also referred to as disability insurance, and is simply a protection which will pay you and your family a benefit amount if you are unable to work because of illness or injury.

Unlike worker’s compensation, income protection insurance will pay your benefit amount regardless of where or how your injury occurred. This means you don’t have to have been injured at work to receive a payout. Income protection insurance is important for every income earner, even if you earn less than your partner. For example, if you were unable to work, your income could no longer go towards your family savings, and your partner may have to cut back on their work hours to care for you or help you care for the kids. Plus there may be medical expenses involved in why you are unable to work, and all of these costs can quickly add up.

When you have income protection insurance you are free to rest and recover from the illness or injury which is preventing you from working, and return to work sooner, getting things back to normal. Financial stress can have a detrimental effect on your health, your recovery and your entire family, but income protection insurance can protect you from all of that.

Image by danielmoyle

  1. This is all very sound but it emphasises saving, budgeting and hedging. I believe that the main thing between us and ‘no income’ is to have more than one source of income. This is the best hedging ever (and I have no intention to underplay the points you raise).

    • Completely agree with you Maria, you can never get away from the basics. I also really like your approach to multiple incomes, it definitely helps to reduce your exposure.

  2. I just thought about my emergency fund…. Suppose I had to lose my job and had to depend on it and I could not find another job. When my emergency fund gets depleted what should I do????

    • I think that Maria’s point about creating multiple income streams would really help in this situation Danielle. I’d also suggest building up your emergency fund over time so that it covers you for 2-3 months minimum.

  3. I still believe that the best long-tern protection you can get against a “no income” situation is to keep learning new things. Keep developing yourself. Keep studying. Be always on the lookout to learn new skills. Value learning for long-term gain over short-term pay.

    • Love your philosophy mate, that is exactly my approach too. Definitely need to think in the long term, nothing worthwhile will happen without some investment.

  4. Do you think 3-6 months of income for an emergency fund is enough? I was hearing that 6-12 is more the “norm” these days?

    • Any amount is good to start with Elizabeth, 6 months would be great and 12 would be an absolut luxury, but I don’t know to many people with that much cash just sitting around. If you do, make sure you put it to good use either in a high interest savings fund or by using it to offset your mortgage.

  5. Every time I deposit a money at my bank’s ATM, I get a pop-up screen reminding me to put money into my savings account at the start of the month instead of the end – that reminded me of your tip #1.

    • Interest is often charged daily, so getting your money in as soon as possible is always a good idea!

  6. What a great idea to have money transferred automatically every week to your savings account! And what a true saying about the ability to earn income is your greatest asset! You can always make more money as long as you are able to.

  7. The first thing that popped into my head was the same as Maria’s comment – diversify your income. We also have two budgets — one for our normal lifestyle that will help us meet our goals. The other is the “bare bones, only spend on dire necessities” budget. If we enter a layoff situation or lose a contract, we can switch quickly to the stricter budget without having to spend a lot of time determining what to cut and when.

  8. In addition, one needs to develop multiple streams of income. Depending on one source of income only is an industrial age idea. If you lose your job and don’t get another job is six months, you will be in a very week financial position, unless your fixed income investments generate sufficient cash flow to cover your monthly expenses

  9. Im impressed, I must say. Very rarely do I come across a site thats both informative and entertaining, and let me tell you, youve hit the nail on the head. Your site is important; the issue is something that not enough people are talking intelligently about. Im really happy that I stumbled across this in my search for something relating to this issue.

  10. Well the two alternatives that have been discussed here are obviously feasible ones. The later (insurance to protect jobless state/when you are laid off) being the better one than the former. However, you can’t sit and rely on these for the remaining days of your life as you have to feed your children. You have to look for potential sources of income. You can search for another job – something online as these are easy to get. Try to use your expertise to help your neighbors and other known ones and get paid. Else you could ask your spouse to get engaged in something or invest the money you have as emergency fund and depend on the money coming from the insurance policy for the time being.