To kick off financial literacy month, I’m focusing on my recent experience of a unexpected income loss as a contract worker and how I’ve learned to survive it.
For those just tuning in, spring was mired with indecision on whether to take a sabbatical; then fate decided and catapulted me into one, right at the start of summer no less. How lucky is that?
I turned my unexpected loss of income into a summer sabbatical, which came to an end in early September. Gone are the days of gardening at sunrise, daytime eavesdropping expeditions at coffee shops (you’d be amazed how interesting people’s lives can be), last minute plans to visit family and friends and fire & ice vacations! In return though, income is flowing again!
Income Loss Scenarios
While this initially started as an unexpected gap in contract work, it wasn’t long before I had other employment offers. It was tempting to jump right back in, but instead I held back and decided to turn the gap into a chosen sabbatical.
A lay off, contract gap or sabbatical all have you paying expenses with no income coming in. I’ve been faced with all of these situations and the main difference, assuming you have emergency funds set aside, is more psychological and what you do next.
When I was laid off, even though I had no immediate financial worry, I was still anxious. Since I was covered financially for some months, I resolved to wait for an opportunity that was a good fit. Even with that financial security, it was impossible not to be anxious. Not matter how good of a position you’re in. I was laid off from a full time job. There’s a huge psychological impact to losing the feeling of security and stability from an automatic regular pay check.
Involuntary Contract Gap
I briefly had a contract gap. Since I intentionally turned it into a sabbatical, I have limited experience with any frequent or extended non voluntary gaps in between contracts. I’m sure this will come with time. This felt different than a lay off. Since I recognized the risk of this happening, I had prepared financially and psychologically, it wasn’t such a shock.
And last but not least, choosing to take a sabbatical to recharge. This takes the same planning and you have funds set aside to cover your expenses. You have a length in mind, or at least a range. The only difference will be near the end depending on whether you have some sort of work for income lined up.
Financial Planning With Variable Income
Majority of employees are familiar with full time, steady pay check. In fact it’s what many prefer; safety is found around the predictable and stable source of income. While the contingent (contract) work force is a trend on the rise, many are unfamiliar with variable income. It’s everywhere around us, from commission only sales income, real estate agent, contract workers, entrepreneurs….
Planning For a Sabbatical With Variable Income
If you take a sabbatical from a full time job (without leaving it), you plan what to do with your time, how long you’ll be off, save enough money for all your expenses and arrange for your return date. Voilà! Ok that’s oversimplifying it but it sums up the salient points.
Stepping away from a variable income career, there are added layers of planning required:
- Business expenses. Yes, those pesky things. Likely you can cut back on quite a bit but not all. Anything from expenses coming up later (think accountant) to ones that cannot stop so you have something to come back to.
- Ramp up time. Full time employee will walk straight back into an income. When you work contract or have your own business, you’ll need extra time to secure work that generates income. Don’t forget about the lag time between securing work and the first pay check.
- Back up plan. With variable income, you may walk into a period of lower than usual income. You need a plan for that.
Variable Income Financial Plan
I found being able to effectively plan for a sabbatical started with a detailed financial plan. Chances are if you just jumped into contract work or a business, you aren’t planning a sabbatical for at least a few years. Which is great because your best tool to create a foundation is looking at your historical expenses.
- Identify expenses you can cut or reduce.
- Detail the expenses and amounts that will not change for that year whether you’re generating income or not
- Identify if there is any consistent timing to lower income period (i.e. seasons, time of year, etc).
Near the beginning of a new financial year, or close after the start, I create a forecast — a month by month financial spreadsheet that includes among other things:
- Recurring expenses
- Consistent one time expenses throughout the year in the month they happen
- Estimate income on a month by month basis. Don’t forget to reflect a lower income amount in certain months if there are trends to it’s timing.
This does a couple of things: projects the earliest date you’ll have enough saved to start your sabbatical (both for your business and personal expenses) and you can avoid being off during peak income months, only to return in common lower income period.
Safety Net and Back Up Plans
When you work full time, you often have built in safety nets. If you get sick, you have medical insurance and often disability insurance. If you get laid off, you may get severance or at the very least, employment insurance. And if you’ve had the chance, access to emergency funds to supplement. Right there, there are 2-3 backup plans for a few situations.
When contracting, you need to create your own series of safety nets. Ideally, you have at a minimum an emergency fund before jumping into a variable income situation. That’s ideal though. Sometimes it’s just not possible. When I started contract work, it was after a lay off and I didn’t have much of a cash cushion to speak of. Over the first few years, I aggressively worked to setup my network of safety nets:
- Cut all non essential personal expenses (nothing more than basic necessities) until all debt was paid off and had a 3 month emergency fund saved up.
- Expenses are kept lower than income in both business and personal. This way I have saved up extra cash in both that I can rely on.
- Purchased my own disability insurance. Should I no longer be able to work for a period of time or much longer, my income is protected.
- For personal expenses, we can live off of the lowest single salary. This of course may not always hold true. Especially if we want to live in something bigger than a 600 square foot bachelor.
What’s The State of My Finances Now?
I’ve come out unscathed. This is in part to everything I did detailed above and a bit of luck. If I encountered an unlikely but not impossible combination of events: could not find a contract, partner became unemployed and we burned through our savings, then that would have been unlucky. Situations like that aren’t likely but not impossible. And they do happen.
All in all though, because of the savings I had in the business, I could continue to pay expenses and draw a salary. Because my routine expenses are lower than my salary, I could make it stretch longer. My entire savings remained intact.
So with a bit of planning, and luck, I was able to take advantage of an unplanned opportunity for a sabbatical and came out financially healthy.
What about you? Have you experienced a period of income loss? How did you get through it?