Select Page

Handling Sudden Income Changes

by Alex J. Coyne

How would you handle a sudden loss or influx of cash? Just about everyone will face both scenarios at some point so you need to be prepared. The right preparation will help you survive a sudden loss and keep you from wasting a sudden windfall.

Are you equipped to handle a sudden change of income? Most people aren’t prepared for any sort of drastic change that could happen today, tomorrow, or a week from now. And it almost certainly will at some point. You could get a better job offer or a raise in the next week, or your income could be slashed in half for the next six months due to an injury. Here’s how to prepare for sudden income change and handle it when it hits.

Income Change Can Go Both Ways

Change can be good or bad, both are usually unexpected. Good changes are unexpected rises in income like a raise, an “employee of the month” bonus, or a policy cashing out that you might’ve forgotten about. Bad changes in income are sudden drops, such as unexpected and unpaid leave, being retrenched or demoted, or having to change your job for whatever reason.

Where You Are At Now Financially

It’s vital for both your financial future and well-being that you always know what state your finances are in currently. Know how much money you have coming in versus what you should have going out. Also, be sure of what you (and your partner) owe and how much money is put away in the bank.

Income Going Up

Income rising even a little creates the illusion that you have more money available to spend. Your standards will likely rise as well. You might be more likely to spend an extra $10 on that coffee, or you might choose to move to a more expensive place because you can afford it now. It’s called “Sudden Wealth Syndrome,” and you are wise to avoid it. It’s commonly associated with lottery winners, but it is also commonly seen when someone’s salary goes up or they inherit money. Don’t be too quick to change your living expenses just because your income has gone up.

Handling the Increase

People who are truly “rich” on their bank statements are more often the ones who don’t flash it. When you get access to more money, don’t increase your standards immediately. Beyond fixing the most urgent, treat your budget as if it were the same. Some of the extra money (whether salary change or inheritance) should ideally go into diversified investments, or it should be put into an account and ignored entirely.

Compare CD Rates

A Dollar Stretcher trusted partner.

Or Income Going Down

We’ve already mentioned why your income could suddenly drop. For these occasions, having money put away can take the edge off a sudden drop in income or being entirely unable to work. Your liquidity ratio tells you how long your assets (what you have) will cover your expenses should your income stop completely. To calculate it, add your assets and divide them by your liabilities. That, in months, is your answer. Are you prepared enough?

Handling the Decrease

When your income goes down or stops, your first step is to go back to the beginning of this article. Where are you at now? Take a look at what you have been spending and see where you could be cutting or omitting. Take a look at what you have been saving, investing, or have in salable assets or marketable skills. This is what gets you through these changes. Some insurance companies offer income protection insurance, and this is highly recommended. You won’t need it until you do.

Get proactive about tackling your debt.

Get the book How to Conquer Your Debt No Matter How Much You Have and begin the journey to financial freedom today!

Change Can Change Again

Up or down, one should never get too used to any kind of change. Remember that the change itself was sudden, and it can change back to something else just as quickly. Once you get too comfortable in a higher income bracket, the drop down is often much, much harder to deal with. Why? This is because your standards have gone too high up, which is where most people have been spending instead of saving. If you hit a low patch, keep in mind that it is temporary as well and you will get a chance to go back up.


Remember that prevention is better than cure. It applies to your finances as much as anything else. In the case of an income raise, you should have a clear investment plan, so you know not to go overboard. This is something you can discuss with a financial adviser at your bank, often for free. During a time when you have a raise in your overall income, it’s a good time to prepare for the income drops, which are inevitable. Put the money away now and take the sting out of what might happen later.

Reviewed June 2019

Little Luxuries

Subscribe to The Dollar Stretcher, our free weekly newsletter aimed at helping you live better for less on the money you already have!

Subscribers get a copy of our ebook Little Luxuries: 130 Ways to Live Better...For Less for FREE!

Your Email:

Follow Us

Little Luxuries

Subscribe to The Dollar Stretcher, our free weekly newsletter aimed at helping you live better for less on the money you already have!

Subscribers get a copy of our ebook Little Luxuries: 130 Ways to Live Better...For Less for FREE!

Your Email:

What to Know Before Co-Signing a Student Loan

Sure, student loans can get your kid a degree. But they can also land them, and you, in a heap of debt if you co-sign and they are unable to pay. Weigh these options before co-signing student loans for your child.

Is Dental Insurance a Money-Saver or Just Another Expense?

Will dental insurance save you money? Not necessarily. We walk you through how to do the math of comparing dental costs to insurance costs and choosing a plan that really will help you save.

Gift-Giving Etiquette When You’re In Debt

What can you do when you’re expected to give gifts you can’t afford? Our frugal readers share their thoughts on gift-giving etiquette when you’re in debt.

How to Get Hired With Bad Credit

We all know bad credit can have a negative impact on our finances. But it can also make it hard to get a job. We explore job search tactics for those with bad credit as well as what you need to know about your rights as a job applicant with poor credit.

Reduce Your Spouse’s Spending without Destroying Your Marriage

Are you worried about your spouse’s overspending and its effect on your marriage? Take these steps to reduce your spouse’s spending without ruining your relationship.

Pin It on Pinterest

Share This