How Long Do I Have to Find a Job before My Money Runs Out?

Let's illustrate the impact of reducing expenses and increasing income on the length of time you have to find a job.

IMPORTANT NOTE: We have not included investment income or inflation in these calculations. These factors will have a slight impact on your own calculations. Obviously, the longer the time period, the greater impact earnings and erosion of purchasing power have on your principal. Since we're projecting a career transition that should be complete within 12–24 months, both these factors should not be of major importance. The savings used for the following calculations are considered to be liquid; that is, they are in a money market account or can quickly be converted into cash with minimal loss of principal. Do not use extremely illiquid assets or high-risk assets in your own calculations. If you do, you might not be able to meet your projections of monthly income.

Time Is Money

The reality of an involuntary separation is that in most cases it will take time to find another job. The question that most people ask is, "How long will it take to find a job?" Given that it is almost impossible to give a reasonably accurate answer without considering geographic location, occupation, the current economy, and dozens of other variables, the better question is, "How long can I afford to be out of work?"

Let's look at two couples with similar monthly expenses and calculate their time horizons for getting a job.

Mark and Stephanie Anderson

The Anderson Family has monthly household expenses of \$3,000. Mark is in the midst of a career transition and has no current income. Stephanie's monthly net income is \$2,000. They have \$12,000 in liquid assets.

The Andersons' calculation is relatively simple:

 MONTH 0 1 2 3 ... 11 12 INCOME +2,000 +2,000 +2,000 ... +2,000 +2,000 EXPENSE -3,000 -3,000 -3,000 ... -3,000 -3,000 CASH FLOW -1,000 -1,000 -1,000 ... -1,000 -1,000 SAVINGS \$12,000 11,000 10,000 9,000 ... 1,000 0

They have a negative cash flow each month, which means they must draw upon their savings to meet expenses. Since they need to withdraw \$1,000 a month from savings, they will have 12 months before running out of liquid assets.

Larry and Maxine Zellers

The Zellers family also has monthly expenses of \$3,000. Maxine has just been laid off and will receive \$1,200 a month severance pay for the next three months; she will then receive unemployment compensation of \$800 a month for the following six months. Larry's monthly take-home pay is \$1,800. They have \$4,000 in liquid savings.

The Zellers' calculation requires three stages since their monthly cash flow is not level.

Stage One Calculation: Three-Month Period of Severance

 MONTH 0 1 2 3 INCOME +3,000 +3,000 +3,000 EXPENSE -3,000 -3,000 -3,000 CASH FLOW 0 0 0 SAVINGS \$4,000 4,000 4,000 4,000

During stage one the Zellers family will not need to draw upon their savings.

Stage Two Calculation: Six-Month Period of Unemployment Compensation

 MONTH 3 4 5 6 7 8 9 INCOME +2,600 +2,600 +2,600 +2,600 +2,600 +2,600 EXPENSE -3,000 -3,000 -3,000 -3,000 -3,000 -3,000 CASH FLOW -400 -400 -400 -400 -400 -400 SAVINGS \$4,000 3,600 3,200 2,800 2,400 2,000 1,600

During stage two, the Zellers family will draw \$400 a month from their savings over a six-month period. Their savings will be reduced by \$400 x 6, or \$2,400, to just \$1,600 (\$4,000 - \$2,400) at the end of month 9.

Stage Three Calculation: After Unemployment Compensation Ends

 MONTH 9 10 INCOME +1,800 EXPENSE -3,000 CASH FLOW -1,200 SAVINGS \$1,600 400

The Zellers family has only \$1,600 in savings by the end of month 9, which will cover less than two months of their cash shortfall. Maxine must find a job in ten months.

Money Is Time

Anything you can do to either decrease your expenses or increase your income, increases the amount of time you have to find work; so the sooner you do this, the better. Let's look at some examples using the Anderson family's situation above.

The Anderson family was immediately able to reduce their expenses by \$250 a month after implementing some of the ideas from the section Reducing Your Expenses. Their revised calculation is as follows:

 MONTH 0 1 2 3 … 15 16 INCOME +2,000 +2,000 +2,000 … +2,000 +2,000 EXPENSE -2,750 -2,750 -2,750 … -2,750 -2,750 CASH FLOW -750 -750 -750 … -750 -750 SAVINGS \$12,000 11,250 10,500 9,750 … 750 0

The Andersons still have a negative cash flow, so they'll continue to draw upon their savings to meet expenses. However, because of the reduced monthly cash flow, they will now have 16 months before running out of money versus 12. By reducing their expenses immediately, they were able to add four months to Mark's transition period before running out of liquid funds.

The Cost of Waiting to Reduce Your Expenses

Now let's suppose that Mark and Stephanie Anderson do not reduce their expenses for the first six months. We have different levels of income and expenses so we must split up our calculation.

Stage One: Without Expense Reduction

 MONTH 0 1 2 3 4 5 6 INCOME +2,000 +2,000 +2,000 +2,000 +2,000 +2,000 EXPENSE -3,000 -3,000 -3,000 -3,000 -3,000 -3,000 CASH FLOW -1,000 -1,000 -1,000 -1,000 -1,000 -1,000 SAVINGS \$12,000 11,000 10,000 9,000 8,000 7,000 6,000

During the first six months the Anderson family will have a negative monthly cash flow of \$1,000. This will reduce their savings from \$12,000 to just \$6,000.

Stage Two: Expense Reduction

 MONTH 6 7 8 9 … 13 14 INCOME +2,000 +2,000 +2,000 … +2,000 +2,000 EXPENSE -2,750 -2,750 -2,750 … -2,750 -2,750 CASH FLOW -750 -750 -750 … -750 -750 SAVINGS +6,000 5,250 4,500 3,750 … 750 0

Beginning in the seventh month, the Andersons reduce their expenses by \$250. Since they still have a \$750 negative monthly shortfall, the \$6,000 remaining at the end of month 6 is exhausted in 8 additional months. Although the Andersons stretched their savings an additional two months, they paid a price for not reducing their expenses immediately: two additional months of valuable time Mark Anderson may need to find a job. An additional 60 days could mean the difference between financial freedom and hardship.

After some discussion, the Anderson family decided they had to do something to minimize the drain on their savings. Stephanie decided that she could work extra hours at her job and increase her monthly income by \$250. Mark, encouraged by his wife's example, decided that completing his career transition would not be delayed if he took on a part-time evening job, contributing an additional \$250 to the family monthly income.

The Anderson's revised calculation is relatively simple:

 MONTH 0 1 2 3 … 23 24 INCOME +2,500 +2,500 +2,500 … +2,500 +2,500 EXPENSE -3,000 -3,000 -3,000 … -3,000 -3,000 CASH FLOW -500 -500 -500 … -500 -500 SAVINGS \$12,000 11,500 11,000 10,500 … 500 0

Although the Andersons still have a negative cash flow, the additional monthly income doubles their available transition period to 24 months.

These examples show the importance of taking action immediately: Reducing spending and increasing earnings, even in small amounts, lengthens the period of time you may need for a successful career transition.

Now set up your own calculation, using the format shown in the above examples. Look for opportunities to both increase your income and reduce your expenses.

Time is money and money is time.

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