How spending can get away from you

I used to regularly carpool with someone from my workplace. It was only twice a week but driving one less day a week was a nice treat especially during the winter (even thought I seemed to drive during the worst winter days). We would talk about many things during our trips to and from work and finances came up more than once. I happily expounded on my spending plan, talking about how the budgeting class I took helped me get firm control of my money. His situation was different than mine for many reasons including that he is married with three children.

He told me he used to work for our company but left for greener pastures many years earlier. Unfortunately, the company he worked for nearly ten years was bought out by an industry giant. Noting the writing on the wall, my carpool buddy left the company on his own terms when he interviewed for and received an offer at his old company.

Here's where the situation gets tricky: when he took a job with our company, he took a pay cut. Four months later, his wife left her part-time job to stay home full-time and evaluate what she wanted to do. How did this change in income affect the family? Not much actually. My carpool buddy confessed that they had not adjusted their spending. He budgeted using credit cards. That is, he charged most expenses and then rectified it when the statement arrived.

Using the credit card as he did is not a great way to manage money. Items and services have been paid for before you know how much you have spent. Then you have to do what he did: dip into savings to make up the balance. And if you don't have savings, you are in debt. Unfortunately, my carpool buddy is telling me this story about four months after his wife left her job and eight months after he switched jobs. He wondered how was he to pay for groceries and other things when he is only left with $200 after all the expenses were taken out. He was considering things like canceling whole life insurance (might be a smart move but not a large effect I imagine) and switching to a 50-year mortgage (a really bad move).

What lessons can be learned from my carpool buddy?

1. Manage the money before overspending becomes an issue. If, like my carpool buddy, you happen to switch jobs for whatever reasons, make sure that the change in pay is taken into account. Immediately adjust spending to the new lower level before it gets you into trouble. Ideally, a spending plan would help guide you in how to spend the new income with small changes in discretionary spending.

2. Communicate with family members. If you are married with or without children, living with someone or in some similar mutually beneficial relationship, make sure your household members understand what the change in income means. For example, no more delivery pizza and rented movie Fridays. Instead, consider making your own pizzas and renting movies from the library--for free. This is a small change in spending with little effect on family time. Children should be informed at age-appropriate levels so they understand the changes and possible "no"s when they ask for a shiny new toy or gadget. Adult household members can help look for frugal alternatives to usual activities and even be supportive in the new endeavor.

3. Preserve savings. Savings should be for unavoidable and unexpected expenses (e.g., furnace breaking in winter) rather than spending shortfalls. By putting a spending plan in place, you minimize the reliance on savings to supplement spending and keep the maximum amount available for those emergencies. You may even be able to add to savings as well depending on the changes you make in your spending.

These suggestions apply to more voluntary situations with a modest decrease in income. If you have a partner and children, this job change affects more than just you and is better discussed and understood before being committed to the change. Hopefully, you will find yourself happy, with a nice savings cushion and living well rather than asking "where did all the money go" after changing jobs.