When income goes down, it often goes down suddenly – one month it is normal, and the next month it is suddenly much less. People may be much slower to reduce their expenses, often taking many months until their expenses are finally in line with their new (lower) income. Why? Denial, unwillingness to modify their lifestyle, lack of needed skills, or other reasons.
That slow response will, unfortunately, delay their recovery and increase their financial problems. The graph (above) depicts a family whose income declined by $800/month. It shows five months where the family’s expenses continued to exceed their new income. During those five months, their spending exceeded their income by a total of $2,000.
Where did that $2,000 come from? Perhaps they had an emergency savings account – if so, the balance in that account is now depleted. If they, like many Americans, had no savings, then they had no choice but to go in debt — they may have made partial payments on some bills, or built up the balance on their credit cards. They are $2,000 in the hole. And while it only took a few months to get into that hole, it may take years to repay that $2,000! (or to rebuild their savings)
The second graph depicts the same situation, but in this case the family rapidly reduced their spending to match their new income. This family also spent more than they earned, but only in the first two months, and only by about $500. They will recover much more quickly from this financial setback.
Reducing expenses isn’t easy. But in the long run, people who quickly adjust to the new situation are more satisfied with the outcome. Even in situations where the income reduction is expected to be temporary, people who adjust quickly come out of the situation in a stronger financial position.