In the midst of all of our debt repayment, I began to wonder: what would we do now if our income was cut off? In an ideal world, we would have a nice 6 month emergency fund to rely on until the income streams began to flow again. Unfortunately, this is far from Utopia and we don't have a 6 month emergency fund. We don't even have a 1 month emergency fund yet.
If our income decreases, our budget would have to be altered as well. We run a pretty tight & frugal ship, but there are a few more corners that could be cut. We made the decision to be slightly less than gazelle intense in order to keep at the debt repayment for the long haul. For example, we have a gym membership, Netflix, and $100 "fun money" each month, per person. We are frugal, but still manage to enjoy ourselves occasionally. In the event of an income disaster, our priorities would have to shift, again, to a completely bare bones budget. No frills, no extras. Just the necessities.
The first priority would be survival. To survive, we need food and shelter. Our mortgage and grocery bill are the first items in the bare bones budget. (Reminder: we are assuming the income setback is temporary. If it were permanent, we would have to move to a less expensive housing option.) The mortgage is constant, but the grocery bill could be trimmed to eliminate any junk food, expensive meats, even dairy products.
The next line items in the budget support our survival and include electricity, water, gas, car payment and car insurance. Our utilities are almost basic needs, but we could theoretically come up with a payment plan if need be. In Massachusetts, it is illegal to shut off the heat during the winter if you are experiencing financial hardship. We have electric heat, so we would be able to keep our electricity even if the bill wasn't paid. Gas, the car payment and the car insurance are needed to continue working or job searching.
Following that is the internet and phone bills. We combine our internet with our cable, and it would actually cost more money to cut back to just the internet. This is needed to continue working (we both work from home 10-20 hours a week) and job search, if need be. Our cell phones are the only phones we have, and we need to be able to contact work and potential jobs.
The last items in the bare bones budget are our debts. The student loans could be deferred if the situation persisted. We have eliminated much of our credit card debt, but the stubborn beast remains. With a drop in income, we would maintain our minimum payments and any extra, if possible, but wouldn't be able to attack the debt anywhere near as aggressively.
Once I put all of these numbers on paper, it was much easier to see how much money we need to make. Most of our expenses are fixed, so this is a pretty accurate picture. For a temporary solution, we would do everything we could to make enough money to equal our expenses, but, if need be, would borrow funds to stay afloat. I wouldn't be willing to give up our house and life for a one or two month drop in our income. Once we start approaching month 3-4, something would have to change.