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Income Dropped? Expenses Have to Drop, Too

Q: I was laid off in November 2009. For the first year, I took the unemployment and tried to find a job, without success. In late 2010, I started my own business, contracting mainly for employers for whom I used to work. Unfortunately, I am making about a third of what I used to make, and even after cutting expenses, some months I can’t pay my bills. I have taken two withdrawals from my self-directed IRA this year. Is that the smartest thing to do? Or should I even out my cash flow by writing myself loans from my home equity line of credit?

A: You need to accept your new reality instead of papering it over with ill-advised loans or raids on your retirement accounts.

That means reducing your expenses dramatically to reflect your new, lower income. If your housing expenses eat up more than a third of your current pay, for example, you need to consider your alternatives. You have equity in your home, which should make a sale easier. If you want to hang on to the house, consider getting roommates or even renting out the house while you live elsewhere (if the rent will cover your home’s monthly expenses).

You may have loan payments or other debts that you took on when you had more income that you can no longer afford. If that’s the case, discuss your situation with both a legitimate credit counselor (one affiliated with the National Foundation for Credit Counseling, at www.nfcc.org) and a bankruptcy attorney (find referrals from the National Association of Consumer Bankruptcy Attorneys, at www.nacba.org).

Reserve your home equity for emergencies; don’t use it to finance a lifestyle you can no longer afford. And leave your retirement funds for retirement.

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