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Can You Afford To Lose Your Job (Contd.)

In my first post, I’d asked what you would do if you lost your job. Not too many responses came about, and I think that’s because people don’t think such a thing will happen to them. But obviously they all sympathize.

I won’t claim to be different. There are just a few things that come to mind.

That Emergency Buffer

You need six months of expenses. I would even say a year.

And don’t get stingy with expenses. Don’t take the month of November and say I spent just Rs. 35,000 this month, so one year = 35K * 12 = <whatever>. You have a number of one time expenses or those that don’t reflect in November. Annual holiday. School fees. Insurance premium. Car maintenance. Medical bills. That TV or mobile or laptop you buy every year. All that, added up.

This money needs to be liquid. Either in fixed deposits or liquid/short-term debt funds.

If you don’t have this buffer in place, don’t go around thinking of which SIP to make or which equity fund to invest in. Build that buffer first.

Planning for desperation

If you don’t have that emergency buffer, then you’re desperate.

If you had that buffer and it is close to running out, you’re desperate. If you have a buffer and have cut through it slowly, reducing your discretionary spend so much that you are left with just absolute necessities, you’re desperate.

In times of desperation you will need to take whatever job you get. The ego of salary parity with the last job, or the same designation, all that goes out the window. I have had to acknowledge a situation of desperation in the past, and I know I was unprepared. If there is a next time I’ll recognize the signs better and spend less time in denial.

Through my bachelor life, I didn’t care about losing my job – even if I worked at a company I owned. (Oh you can lose those too). The thing is – I was employable, and I didn’t think the economy would tank, and that I would always be able to get a job. Because if it comes down to it, I would work harder, longer, and smarter than enough people to land a job. It’s remarkable how much more confidence you can get if you will take any job, any role, any designation.

What if you still don’t get a job? You have to be able to borrow. After all, people still need to eat and live and clothe themselves.

Preparing to Borrow: The OverDraft Account

Borrowing from friends or family is okay, and is used often. Moneylenders are the last resort – they charge 2% to 4% per month, usually with collateral.

But there are other, more reasonable avenues. If you are a low debt person, then you can borrow against securities you own, or a property, or gold, or even your endowment insurance policies. For this, you can set up an “overdraft” account that will give you access to money if you ever need it.

The overdraft is like this:

  • You give your collateral – the car, shares, whatever.
  • The bank opens an overdraft account for you with a “limit”. This is a new empty account of sorts, which you can “draw” money from.
  • You can issue cheques from that account (or the bank might give you a debit card or netbanking transfer facilities)
  • When you get money to pay back, you just put the money back into this account, even partially.
  • You get charged interest only for the amount drawn, for the period it is overdrawn.
  • They usually charge you processing fees of 1-2% of the amount, and then 0.5% per year. So it may be expensive to set it up in good times. If times get really bad, there are chances that such products will not be available to you. It’s a trade-off.

So if you need Rs. 1 lakh for a month, and then pay back Rs. 75,000 next month and 25,000 the month after, you get charged interest on:

  • Rs. 100,000 for one month
  • Rs. 25,000 for the second month (outstanding after you paid back Rs. 75,000)

The OD will help you get access to cash fast, should you get desperate. The interest costs can be 18% or more – but in a crisis, such accounts are really valuable.

Remember, you still need to pay the interest on the OD every month. If you haven’t maxed it, you can just take the sum out of the OD and pay it back as interest.

Fighting fit, with a break

If you ever get fired, consider taking a month off. You can’t be in such a bad shape that you can’t take a single month off. Get out there and do things you’ve always wanted to do but never done, like watching at 12 noon movie, or climbing a mountain or what have you.

And then come back with a vengeance.

Starting up…

…is not something you do until you find a better job. The lure of the tag, of starting something, is attractive. And even more so now with all the hoopla around it, the events, the prizes, the fact that some people get funded by Venture Capitalists for just breathing and so on.

Starting up is a life decision. You trade a cash flow (salary, or annuity) for an asset that you hope will appreciate, and eventually provide cash flow or get bought by someone bigger. Big success stories are rare, and the stress takes a lot more out of you than a regular job will. No, a startup isn’t what you do between jobs. It’s what you do because you want to do it.

I left my second job in 1998 – because I wanted to start a company, which I ran for seven years. It’s what I wanted to do. I was not immensely successful, but if you put me back there, I would still start up again. I’ve been on my own the past two years hunting to make the next venture a success. It is a full-time job, not something I think of as a “hobby” or “pastime” or “temporary designation”.

What about those EMIs?

If you can pay, pay. If you can’t pay, you can renegotiate with your lenders, asking for some time to pay the money back. Get all your documentation in written – if you are making phone calls, record them. Escalate matters to the highest official possible.

Lastly, if you have to stop paying, be prepared that the lender will repossess what you borrowed against (your house, your car etc.).

But remember that a default will hurt your credit later, as the lender will enter a note into your CIBIL record. So default at the risk that you may not get a loan again easily.

Do not fear, though. Banks are going to be just as worried about you defaulting, if there is a crisis and too many people have lost their jobs. You can use the situation as leverage to get the best deal that you can. (Don’t be ashamed – the banks will rip your heart out if it was legal.)

EMIs are necessary, but there are various options to change them – you can back-load them (pay more interest and principal after a couple years, pay lesser now). You can ask to only pay interest for a few months before you resume paying the principal. Only as an ultimately desperate person will you ever sell your house to pay off the bank – and you can set up your options so that you’ve tried everything else.

Why aren’t you telling me to cut expenses?

I could, and this is advice you will get all over the internet. Cut your expenses, hunker down, don’t eat out, sell the car and take public transport, change clothes only every other day and so on. Yes, you can do this. But this is easy preaching. It’s not practical because you will do it anyhow, if you have to. I would get really pissed off if anyone comments that I should live life in a different way just because I haven’t had a salary in two years, or if I have a bad month trading.  So I’ll give you that respect. There is no point in my being all condescending.

No, sir.

That is not the way I operate. What you need is another source of income, and you’re looking for it. Cutting expenses is temporary and defeating. Sometimes doing so gives you a false sense of security – such as: if I cut this and that, I can survive two years! Yes, but like the joke goes:

Preacher: If you stop drinking, the women, the eating out, sweets, salty and fried things , you’ll live to be a hundred!

Patient: But what’s the point if I can’t do any of them? (“Toh jee ke karunga kya?”)

Don’t do it unless you absolutely have to. Life a normal life. Travel, eat, drink and buy clothes like earlier. The idea is to get your emergency buffer so that you can be normal while you get your life back in order.

If you were, on the other hand, inflicted with a life threatening disease that would likely make you incapable of doing a job, I would then say cut down expenses as much as possible. But not…okay, you get the picture.

This is so depressing.

I know.

But losing your job is depressing enough. I’m sorry to throw out gyan like this but there is no point getting depressed. We live in a capitalistic society which gave us great money and opportunities on the way up, and we’ll have to live with the crap it hands us (like getting fired just as easily) on the way down.

You don’t have to change your lifestyle, or grow a beard and smoke pot. (It might help, but that’s not the point) If you spend a little time planning your emergency buffer today, it gives you time during your emergency to consider some of the other options as well, without cutting out your gym subscription.

It’s not personal, it’s business. And your reaction to it has to be business-like as well. It might help if you know that it’s not the end of the world – and I hope this post helps.

  • Vivek says:

    Good sound solid advice. Thanks for writing this .

  • Chandermani says:

    Hi Deepak,
    Excellent article and some very good pointer to prepare for the worst. I have a question. If you are a salaried person you may also have PF as an option. What are your takes on it. How advisable is withdrawing for PF account in such conditions. Can it be part of your contingency plan or it should not be touched till retirement.

  • Srinivas says:

    True. This is a profound question.
    What if you lose your job today. Likewise What happens to your family if you are not there from tomorrow, etc. Generally people will be under the impression that these things will happen only to others and not to self. This is particularly true in case of youngsters.(Not that others are immune).
    However, these questions, when contemplated seriously, provide profound insights and startling revelations, which may modify ones perspective on life.
    For example your explanation on ways to cope. Your suggestions are good and cover a broad spectrum of situations. However, financial situation of each is unique. That is where individual’s contemplation becomes essential.
    This contemplation is not a bit question which can be answered in a second and done away with. Reflection ideally should become a part of life, as ones situation keeps changing uniquely on a daily basis.(However, one should be cautious as too much of this may lead to depression)
    When a person is employed, one can be thought of as if he were standing in a single pillar building, which can crumble any time.(One can lose the job and loose the security any time). In such a situation, one needs to strengthen the pillar continuously. For a life based on financial security of a person, the general suggestions should be obvious. Buffer cash, ways to pay EMI’s and ways to get additional cash in case of dire needs.
    Toning down life style as a step towards insulating one(family) from such dire needs is another such.
    Similarly for the question of “If i were not there tomorrow”, some solutions will be to make spouse and children socially and financially independent and get security nets in place etc.
    These, as Covey puts it, are quadrant II activities, very important but not urgent.
    Thought provoking piece, As always.

  • Hi Deepak,
    Excellent Stuff 🙂 Tweeting it across to more people.

  • Ketan says:

    Good post… wrote exactly on similar lines two years back ….
    Some good points from you as always.

  • Ketan says:

    Deepak, I think you are not taking into account the emotional and social trauma for a laid-off person. However smart and mentally tough a person is, job loss will hurt. So in that state of mind, I do not think anyone can continue the regular life-style (especially going out for dinners or buying cloths). I will not advise on drastically cutting down the lifestyle but a certain amount of cut-down will not only help financially but also gives a sense of doing things right during this tough period. I think very few people can really get a “false sense of security” by cutting down expenses when they don’t have a job [unless they are lazy by nature] 🙂
    I think it is important to be mentally stable and strike a balance in your every step during a job-loss. Have a balance in cutting down lifestyle but also have a balance in borrowing funds. If at one extreme it doesn’t make sense to grow beard but at the other extreme don’t go out borrowing money thinking its an easy way out. Strike a balance and work positively towards getting another job or starting out on your own!!

    • Ketan, you have a point – if the trauma is big, then people will cut their expenses anyway (as in, I don’t need to tell them that). The thing is, you “feel” that you should cut expenses. You most often don’t need to. And the fact that you’re cutting expenses is depressing and makes you lose focus from the point that is important – of getting another job. I can tell you this from experience and from close association of those that have lost jobs.
      Yes, agreed that borrowing should be a last ditch effort and only for high priority expenses. Sometimes people forget that as well. But borrowing is often underused, definitely at the OD level (people go and borrow from moneylenders first!)

  • mentat says:

    Something the article yesterday..came back to read it again for something..and can’t see it except for the first 3 lines…

  • Praveen says:

    Came to know about the importance of contingency fund from Subra’s blog. Just last week my US MNC company laid of some people in US, but I don’t know what to say when same situation arrives in india when my collegaues talk about takin a 20 year loan for house without any contingency fund backup.

  • feltra says:

    Thanks for covering an area not usually done, Deepak. A few observations / comments:
    “Losing a job” I think must be part of financial planning. The whole idea of financial planning is how to plan your income, increase in income etc so as to keep meeting your expenditures and increases in expenditures. “Losing a job” I think comes in Emergency category, same as (God forbid) any major hospitalisation etc (for which insurance is never enough).
    PF / PPF etc are ok, but have a huge timelag – and one can only take loans from it for awhile.
    Too often, we focus on how to reduce the expenditure only and don’t think enough of increasing income – thru other avenues. Ideally one should have upto 5 streams of income, just one of them being job. The others *could be* for example, rental income (from 2nd property bought in good times), FD income, income from Dividends etc, a “side business” or franchise / hobby kind of income etc. True, if you are in a high powered 24×7 job you don’t even have time to even think of such things. Thats why these must be thought out in early financial planning when the kid-from-college start earning their first salary.
    One more thing (which happens nowadays at least in cities), is both spouses must be financially able to support themselves (thru their jobs or other resources) w/o 100% dependence on the other. This should be done wherever possible.

  • venkat says:

    i lost job during 1997 age of 37 with two kids going to school.i have parents well to do with good pension and own no liabilities on that side.
    i found that most i was earning was spent when in job and little bit of saving in 15 years when others were double income no kids or one kid.i was only earning in my family.
    .my was transferable job of sales line.Adds to costs creating social support every 3 years for safety.took a review of expenses. found most was duplicating because of transferable job.
    i had 4 years survival money including pf. that time.
    sold the car, moves to family home .
    my survival money now doubled to 8 years just by this.
    and started my own trading shop.[ timing was wrong as recession set in and most small /mid firms closed down this 5 years when i tried to do business with them resulting in to bad receivables..]
    .i have not been able to come out of those years mentally.
    i have seen some stocks to become 10 times in 10 years by then, like jp industries.
    god helped me with jack pot of life time .
    now i am farmore happy , enjoy life , do job/ work if i like .
    and trade/ invest which is my life time passion.
    folks life is not to spent hard earned money on hotels and life style till you have enough
    to servive without job .
    and with other skills you should be able to give you survival like tution/interest income/managing govt bailouts for poor!!!!!!!
    do not go for business when recession is likely to hit and thats why your company has laid off many including you giving some reason.
    you can live more comfortably in job if you are not under this pressure of survival.
    boss can’ t make your life hell . you can choose jobs/work.make money and enjoy life.
    have savings .
    Develop skills which pays other than job suitable to your personality/family back ground./natural ability.
    do not start new business when economy starts going down from top.

  • Harsh says:

    –Kudos Deepak,
    I really like the detailed treatment of the subject.
    –At the same time i was reading “Stock investing for Dummies”
    –I would suggest the “calculation of expenses” approach as the method to calculate personal cash flow
    –Maybe,just maybe, an alternative approach to job would be the icing on the cake as the next sequel of this article
    –But the hard hitting bottom line is there for all to see
    “Keep a savings buffer”

  • kartik says:

    hey, just came across this site and loved what you wrote. Having been between jobs and startups, i’ve experienced the stuff u voiced. i concur with your advice and encourage you to continue writing! loved it