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How long could you last if you had less income?

There is plenty of negative news around at the moment. Governments are shrinking the public service, power bills are rising and many companies are reducing staff. Looking overseas, times are tough in the US and Europe and we are fortunate that we don’t live in Greece or Spain.

So, how long could you last if you found yourself having to cope with less income? What have you done to protect your personal economy from the vagaries of the world economic situation?

Once upon a time, the standard answer to the no-money dilemma was to borrow against your home or spend more using your credit card.

If you haven’t figured out the formula for a sound financial foundation yet, let me be very clear: spend less than you make. While it’s popular to say that consumption drives our economy, it also drives our ever-increasing debt. The trick is to smooth out the hills and valleys of our consumption and earnings. Yes, there are times when we need to spend more. And there are times when we earn more. But if every time we have extra money we find a way to spend it all, that leaves nothing for the troughs in our financial lives. And that means turning to credit. Some of us never recover.

If you’re still buying the argument that a line of credit or a higher credit card limit is a great emergency fund, it’s time to wake up. Lines of credit are nothing more than debt traps. Do you really want to be unemployed and $20,000 deeper in debt a year from now?

Without the “security” of a line of credit and in anticipation of the wolf at the door, it’s time to make sure you have a real emergency fund in place. If you haven’t already started building an emergency fund, ask yourself how long you could hold on if your income suddenly evaporated. Still think a line of credit will do just fine? How deeply in debt are you prepared to go? And how much of your future income are you prepared to shell out in order to pay for having not been prepared financially?

Setting aside some of what you’re earning now for the eventual change in personal circumstances with which we’re all faced— unemployment, illness, death, divorce—is just good common sense. So start now and that way you will build up a cash reserve to tide you over when the unexpected happens. It is always better to use some of your savings than to go further into debt.

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