5 Events that Can Lead to Loss of Income (And How to Prepare)

Loss of income refers to a situation in which one gets deprived of the ability to make money, and we can no longer cater to their expenses and pay bills. 

The stress of losing an active source of income can keep you up at night. Its effects are always detrimental and can lead us to debt and impoverishment. It is why one must learn how to protect themself from the possibility of total loss income and the devastating effects that follow. 

This article dives into the five most common events that lead to income loss and explores how we can prepare for each.

Also read: Every Employee’s Nightmare: Loss of Income

Incapacitation Due to Accident or Chronic Illness.

Career threatening injuries and illness can put you out of work for years, and sometimes for life. It is one of the most unexpected ways a person can lose their source of income. 

We have all met people involved in grisly accidents that left them disabled, in crutches or wheelchairs and unable to work. Or those who suffer from a chronic illness that has left them bedridden, barely able to do anything for themselves.

When this happens, some employers can give you sick paid leave. But there is only so long they can keep you on their payroll; they will have to let you go after some time. And you will be left in the cold, with no active source of income, hospital bills to pay, and unable to work.

How to Prepare

The best way to prepare for a loss of income brought about by accidents or illness that makes you unable to work is to have your insurance in order. It would be best to buy insurance policies that you can claim when in that scenario. Some of the policies we recommend are;

• Disability Insurance: This insurance policy will replace part of your income when you sustain an injury that leaves you disabled and not in a position to work. Some insurance will cover both physical and mental disability.
• Income Insurance: This policy will also help you replace part of your income and pay you until you get back to work.
• Health Insurance: This policy will help you offset medical bills and save you from having to dig into your rainy day or retirement funds.
• Life Insurance: With this type of policy, the insurer will pay your dependents a lump sum if the injury or illness you caught leads to your demise.

Also read: Why You Should Diversify Your Income

Retrenchment and Termination

Retrenchment happens when your employer finds you redundant for whatever business reason. It can be because your services are no longer needed or they are trying to cut costs of running their business. Under the Kenyan Employment Act, the employer has to pay an employee declared redundant severance pay at the rate of not less than fifteen days' pay for each completed year of employment. 

Termination happens when you get fired. It can be because of incompetence from your side, other violations or generally mostly justifiable reasons from your employer’s point of view. Either way, you lose your source of income.

Also read: 7 Ideas to Diversify Your Sources of Income

How to Prepare

Retrenchments and termination are the typical way most people lose their source of income. That is why it is always advisable to be prepared for it. The best way to do it is to improve your employability status by:

• Improving your skills (and learning new ones): As you climb the employment ladder, the power of soft skills is immeasurable. Learning these skills can make you a valuable asset your employer can afford to lose. Some of the skills you should know, and perfect are communication, critical thinking, problem-solving, and people management.

• Increase your education level: Getting a postgraduate or master's degree is one way to upskill and develop your expertise in your field. This move will most likely increase your employability. You need not exactly go back to university, you can take professional certifications, take online courses or self-teach yourself such as a new in-demand programming language.

Employer Going bankrupt and company closure

The company that your employer runs may not always stay afloat. Poor management, poor financial decisions, and outdated business models, among other causes, can cause their business to fail and force them to declare bankruptcy. It will immediately cut off your source of income.

Also read: Employed Full Time? Here are 7 Ways to Increase Your Income in 2022

How to Prepare

With the dire economic situations countrywide, businesses are at a considerable risk of failing and eventually going bankrupt. When this happens, employees suffer the most. Here is how you can prepare yourself for such a scenario.

Improve your employability: You can do this by increasing your level of education and earning certifications most relevant to the prevailing and future labour demands of your field. It will cement your expertise and show prospective employers you are someone up to date with what the market requires. 

Create a Solid Network: When your employer goes belly up, and you are looking for a new opportunity, the people you contact first will be those within your network. They're the people who will be able to find you new openings, and they can vouch for you. 

They can only help you if prior to losing your job, you actively engaged with your networks and created strong ties - you should do this so well such that when your name pops up, they can easily tell what you can offer. 

Sudden and Unexpected Events

These are events that are completely unforeseen. They can be an unexpected natural event like the COVID-19 pandemic - the war in Ukraine, or the recession of 2008.

If the last two years have taught us anything, it is that we can lose our source of income in a blink. At the height of the pandemic, it was reported over 1.7m Kenyans lost their jobs - in three short months.

How to Prepare

Without the right cushion, sudden occurrences can have devastating effects. It can lead someone to debt and, worse, poverty. These two strategies, if done well, can help you pick yourself up when faced with a loss of income;

• Short-term investments: Short-term investments that can easily be liquidated can come in handy when your employer goes bankrupt. It would be best to choose investment vehicles with short tenures that range from one to three months. A good example in Kenya is the treasury bills offered by the Central Bank of Kenya. Other assets you can invest in that are easy to liquidate are gold, silver, and other precious metals and Cryptocurrencies. Beware that these other asset classes are highly volatile and should not form the only component of your cushion. 

Read Also: What the Crypto Crisis Teaches us About Risk Taking

• Always Have Emergency funds: These funds are different from your other type of savings like retirement savings. It is money you set aside to use when unexpected bills arise or when you lose a source of income. It is the money you will use until you can land back on your feet. It is advisable that you always set aside enough money to cover at least six months' worth of living expenses.

Read Also: What is an Emergency Fund and Why You Need One

Retirement

Retirement is the ultimate loss of active income for all employees. It is unavoidable. It is the loss of income that everyone prepares for all their working years. 

How to Prepare

We all want to spend our retirement life in peace, not worrying about money. This is why we must take extra measures to protect ourselves when we are old and unable to work. Here is how to do that;

• Retirement Accounts: Saving in a retirement plan is one of the easiest ways to prepare for retirement. Taking this path will require a lot of commitment to saving at least 15% of your monthly salary towards this goal. You can also use other saving avenues such as Saccos and keep reinvesting your dividends. Formal retirement accounts invest your money in different asset classes and either pay you a lump sum once your chosen retirement day comes or give a percentage as lump sum and the balance as monthly payments for life. You have to carefully consider your options before settling on an account. You could also have multiple channels working towards building your retirement fund. Most important is, start as early as you can. 

• Income-generating investments: These are types of investments that are meant to keep you earning after retirement. One such investment is real estate, developing properties and renting them out. It will ensure that long after retirement, you will still be earning. Another such investment is starting a business. After retirement, you can hire professionals to run it on your behalf and reap the profits. You can also buy stocks or invest in long-term government bonds. 

Also read: Planning for Retirement: Key Factors to Consider

WRAPPING UP 

Loss of income is a jarring experience. This is why we must always be prepared for it. Without preparation, we risk making hasty decisions that can ripple the effects of income loss - causing us more problems.

We might not be able to prepare for every one of the events mentioned above, but preparing for two or three, puts you in a better position to deal with the loss of income when you experience it.