Preparing & Responding to Changes in Income

Preparing & Responding to Changes in Income
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  • 0:00 Changes in Household Income
  • 1:07 Responding to a…
  • 3:14 Responding to an…
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Lesson Transcript
Instructor: Ian Lord

Ian is a real estate investor, MBA, former health professions educator, and Air Force veteran.

This lesson will discuss how to prepare for changes in household finances due to fluctuations in income. Ups and downs in finances can result from issues like job loss, disability, death, or from more positive events, such as a promotion or new job.

Changes in Household Income

Have you ever lost a job unexpectedly or had to work fewer hours because of an illness in the family? Have you ever received a significant pay raise or a major promotion? In either of these kinds of situations, your family has experienced a change in income. It's likely that throughout your life both kinds of situations will come up. It's helpful to know how to handle these changes in income without ultimately harming your finances.

Let's imagine that your friends Jamie and Ryan are going through this right now. They are expecting their first child and have enrolled in a financial family planning seminar. The facilitator, Chris, lets the class know that changes in income for better or worse can be the source of many financial frustrations. Chris tells them that everyone's financial situation varies, but having a plan for how to handle income changes can reduce the anxiety surrounding those events. Let's explore how household life cycle events, such as births, deaths, disability, promotions, or job loss, influence household finances.

Responding to a Decrease in Income

With Jamie considering staying home to raise the baby, the first consideration is what will she and Ryan do with only a single income? Even if she was planning on going back to work, there is the possibility that she might need an extended medical leave following the birth. The most immediate impact to their finances is the drop in disposable income. Disposable income represents the money left over after expenses are paid. Disposable income can be used for savings, investments, additional retirement deductions, and vacations or other luxuries.

There are a number of considerations in responding to a decrease in income. Having a child often results in tax deductions and credits, which reduce the family's tax burden. If Jamie is no longer working, her household income may drop below the threshold for low income assistance benefits, such as the federal Women, Infants, and Children Nutrition Program; Supplemental Nutrition Assistance Program food subsidies; state unemployment benefits; or state subsidized health insurance. In cases of disability, having a short- or long-term disability policy can help replace some of the income that was lost.

Jamie and Ryan will have to adjust their budget to account for the lost income. The good news is that some of their prior expenses will disappear or decrease. Staying home with the baby eliminates the cost of daycare. Jamie will no longer have to commute to work or maintain a professional wardrobe. Although she will spend much of her time caring for their child, she can perform money saving activities like preparing meals at home instead of dining out.

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