Layoff Lesson 1 – The Time to Prepare for the Unexpected is Before

Obviously. This extends well beyond a layoff. It can deal with family tragedy, an illness, or a natural disaster. It also can deal with positive events: an investment opportunity, a career change, or striking out on your own as a business owner.

Stop the bleeding. The worst position to be in when you find your income disrupted is your expenses. We will discuss spending in a little more detail in Layoff Lesson 2, but when it comes to debt there are a few things that you do not want to be responsible for:

Credit card debt: Carrying credit card debt that you are paying interest on is the worst debt possible. The interest rate is high, and most people are paying on purchases that added little value to their lives. Pay the credit card off as quickly as possible. You do not want to be paying for a dinner you had four months ago plus interest, especially if your income has been reduced.

Student loan debt: Similar to credit card debt. Pay this off as quickly as you can. Also, encourage anyone thinking about incurring student loan debt to make sure that reward is worth the cost. You do not want a Master’s in Art History with $100,000 in student loans when your likely employment will be pouring coffee. Likewise, you do not want to pay private school tuition so that you can be a social worker.

Car loans: Having transportation that is reliable is a must for most families, but cars are a horrible investment. Their value declines every year. The families that I know that have their finances in order buy used cars because most of the value that a car loses is lost in the first one or two years. They never lease a vehicle because a lease is admitting to always having a car payment. We personally buy used cars that are generally three to six years old, and we try to drive them for six to ten years. Our repair bills are minimal.

Maintain an emergency fund. General rules of thumb range between six and twelve months. I think a lot goes into this calculation based on your monthly expenses, your annual income, your employment prospects, etc. If you finish the month with no money left in the bank, and your skills do not make you particularly competitive in the job market, it might make sense to store up more in savings verses someone that is able to save 25% of their income each month, they have minimal debt, and their skills are in high demand.

Let us pause here and take stock. Any generic Internet article will tell you all much of this. It is basic finance 101. This is not good enough because these are only defensive tactics. You need a strong offensive strategy, too:

Have a side hustle. Active income every month that arrives outside of your day job (what we call the W2 income) gives exponentially more freedom. Earning $1,000 each month goes a long way towards keeping you afloat when times are hard. It can also go a long way to achieving financial independence when times are good. We know of households that generate almost $1,000,000 in W2 income annually where a small side hustle is maintained. I go deeper into the side hustle in the post here because we believe it is so incredibly important.

Invest in cash flow. I have a lot of issues with investing in the stock market that I will not go into right now. One of the major issues is that cash flow is not the primary purpose when investing in stocks. And yes, I know that stocks pay dividends, but do the math on a 3% dividend and how much you would need to invest to yield 25% of your annual W2 income. It is ridiculous. If your income is $100,000, it would take almost $900,000 to generate 25% of that income! Even when you find a stock with a higher dividend, there is no guarantee that they will maintain that dividend. If you have lost your job, chances are the economy is in trouble. If the economy is in trouble, companies often opt to cut their dividend.

There are a surprising number of investments that provide excellent cash flow. The problem is that your average financial advisor 1) is not even aware of them, 2) is prohibited from selling them to you, or 3) is not incentivized to tell you about them.

Examples of cash flowing investments include investing in rental property which can generate great cash flow but can require significant work and capital, investing in bonds but require an exorbitant amount of capital, or investing in a syndicated investment.