1.4 Choices when experiencing a drop in income

Most of us strive to stay out of debt, work from a budget, and squirrel away money for major purchases. But there may be a day where you experience a drop in income.

It's for this reason that planners tell us to set up an emergency fund. Yet that doesn't always cover the unexpected or the uneven expenditures. However, a properly planned budget can cover these irregular expenses. Your savings plan can include regular payments into a deposit account that's specifically earmarked for these expenditures. For longer-term expenditures, you probably should look at keeping those funds in something that pays a higher return, like a managed fund, until a couple of years before you're going to need the money. Then park the money in a deposit account

It is important that you determine how much you'll have to save to reach those goals in specifically designated accounts. It's a discipline that pays off financially as it avoids putting yourself in debt -- and in situations where you're trying to pay off credit cards with high interest rates.

List good reasons for going into debt

Most of us are forced to dabble in debt. We should all have a plan in place so that we know what to do when that happens. The first step is to think about what you consider legitimate reasons to go into debt. Make a list. Most likely they fall into two categories: emergencies and opportunities.

Add to your list "unexpected opportunities." That would not include the opportunity to enjoy a good bottle of wine. But it would certainly include adoption. Certain business opportunities might go on the list, too. Most people need to borrow if they start their own business, for instance.

Strategies to discipline yourself

Of course, you should tap into it only when you need it. And you should have a plan to pay it off as quickly as possible. If you lack discipline, play a game with yourself to get the loan paid off. For example, if you decide to pay it off in a year, make a little coupon book for yourself like you might get with a car loan - with 1/12th of the balance on each coupon - and put it with your bills.

Remember the rule that you should pay yourself first. Getting out of debt is part of paying yourself first, so that you can get out from under the debt and save the money you're paying in interest.