In case of layoff: A financial fire drill

By Donna Freedman

After watching several friends and relatives get laid off, Sonya Ann checked the maximum unemployment benefits in her Midwestern state: a little more than $500 a week.

Her family's current expenses: $2,728 a month.

Time for an extreme budget makeover -- before it might be necessary.

"I know that if (unemployment) did happen, I wouldn't be thinking clearly. So I want to have a fallback plan," says the reader, who asked her last name not be used.

Who among us couldn't use this kind of financial fire drill?

Now is the time to take a clear-eyed look at how you'd pay your bills if the first thing your boss says tomorrow is, "Clean out your desk."

The average unemployment check is $293 per week. Meeting your financial obligations probably won't be easy even if you have an employed spouse or partner. (For a state-by-state list of benefits, click here.)

Being jobless is scary stuff, and some folks just can't deal. "Many people in financial crisis simply stick their heads in the sand, refusing to admit the severity of the problem and ultimately making matters worse," notes MSN Money columnist Liz Pulliam Weston in an article called "How to not pay your bills."

The idea of a financial fire drill isn't to not pay your bills -- it's to cut back on the number of bills you have to pay and to reapportion available funds. Here's how.

An economic epiphany

How much do you need to live on each month? If you can't answer that question, start tracking your spending. What you find may surprise you.

It downright horrified Alma, a 36-year-old mother of two who lives near Philadelphia. Her married life began on a shoestring, but as they earned more money, she and her husband began to spend freely. Lately, she'd become uneasy about "the gluttony of our life," and when she saw the "Your unemployment budget" thread on the Smart Spending message board, "it was like an epiphany."

Her husband is a project manager for a large manufacturing company, and Alma works part time in a supermarket. Their basic monthly expenses are $4,477. If her husband were laid off, he could expect no more than $2,236 a month in unemployment. Their $15,000 savings account wouldn't last long at their current rate of spending.

Hence Alma's epiphany. "I've been blind," she says. "What have we done the last few years? Accumulated a lot of (stuff) and a lot of debt."

She's paring the cable and cell phone plans, will talk to their insurance agent about raising deductibles and vows to become "the gas and electric police" to trim the utilities from their current $3,300-a-year usage.

Sonya Ann's family earns a lot less because health problems keep her from working outside the home. Her husband's salary covers the bills but "without much wiggle room." Expenses related to a recent death in the family wiped out their modest emergency fund.

On paper, she shrank their monthly budget from $2,728 to $2,107 -- under what her husband would get on unemployment. Among other things, she would stop extra payments against the mortgage, raise her insurance deductibles and drop the land line, because they can piggyback on a relative's cell phone plan.

"My goal is, 'Let's not lose ground,'" she says. "If (unemployment) hit us, I could pull out the plan and use it."

The 'baseline budget'

Both Alma and Sonya Ann created what CPA Sally Herigstad calls "a baseline budget -- the no-frills, stay-alive budget."

"There's something very freeing about finding out what that number is. You have a lot more options when you're not a slave to high living expenses," says Herigstad, the author of "Help! I Can't Pay My Bills" and a contributor to MSN Money. She speaks from experience: 10 years ago she was laid off without warning shortly after switching careers from accountant to tax-software designer.

A baseline budget looks something like this: shelter, basic food, basic utilities, transportation and basic debt service. "Basic" means just what you think it does: Ixnay on the three-night-a-week takeout food. Reduce cable and cell plans or eliminate them outright. Stop extra payments on the mortgage, student loans or credit card debt.

Are your kids involved in a ton of sports, lessons or other activities? You'd need to cut back on those, too. "Think hard about things that require fees and uniforms," Herigstad says. "Could you pass on the equestrian lessons for a year?"

This won't be an easy sell. Your spouse might long for the days of football season tickets or weekly manicures. Your teens may howl that all their friends have unlimited texting and stretch Hummer limos for the prom. They'll get over it. They have no choice.

Of course, there's also the chance that your partner and family will get on board. Sonya Ann's daughter, a high school junior, told her parents that lots of her friends are starting out at community college and that she's fine with going there, too.

Be honest with your kids about what's going on, but don't dump your anxieties on them. Short form: We're going through challenging times, but the family will get through this.

Your kids may react to unvoiced fears, however. S.K., who has three children still at home, was unemployed for 10 months; during six of those months her husband was also out of work. In June 2008 she was hired by an East Coast newspaper, and her husband recently got a job in the transportation industry. They're struggling to catch up on unpaid bills.

Out of the blue last week her youngest child asked, "If we lost our house, where would we go?"

"We went through hell last year. They are stressed over it," says S.K., who's 48.

And it ain't over yet: She's already survived one round of layoffs at the newspaper, but more jobs will be cut in April. "You're thinking: 'I'm next. What am I going to do?'"

For starters, a financial fire drill. Like Alma, S.K. and her husband never really questioned the bills that came their way. "We've never committed to (frugality). We always had jobs with good pay," she says. Lately she's taken a closer look at expenses and found ways to cut back on cable, phone and utility bills.

She's eager to build an emergency fund, because the long spell of unemployment used up every cent they'd saved. Having a savings account once more will make S.K. feel "a little safer."

Continued: Cleaning financial house

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