Riches to rags: Psychological impact of losing a cushy lifestyle

You think you're set: a nice home and car, vacations every summer and a hefty income to support everything else in your family's lifestyle. Then, you receive a pink slip, and life as you know it is over.

Unfortunately, the scenario is not that unusual. Based on the country's shaky economy, layoffs and job losses are a reality for Canadians.

A May 2015 CIBC World Markets report warned that the percentage of Canadians who can't keep up with their debt is rising for the first time since the Great Recession. The bank is blaming consumer insolvencies on the fallout of a hurting oil sector -- in Manitoba and Saskatchewan, insolvencies rose by 11 per cent in six months, while in Alberta, they climbed by 6.5 per cent -- "the worst showing since the recession," according to the report.riches-to-rags

Tom Feigs, a Calgary-based financial coach with Money Coaches Canada, isn't surprised by the report's findings. "Alberta and a few other provinces have seen real estate value and wages increasing in the past five to 10 years, so consumers are seeing this extra amount
of money and starting to make unwise decisions on increasing their
living standards," Feigs says. "When it gets to the point where there's a drop in salary or loss of job, it changes cash flow quite a bit and that
surplus disappears. It's a shock to lose your job, but it's even worse if
you're not preparing yourself for the eventuality."

Grappling with a loss of a comfortable salary and the perks that went with it goes beyond problems with the balance sheet -- it can affect your emotional state, too.

Loss of wealth is a legitimate grieving process
When you take a pay cut, your self-confidence, sense of worth and your identity all take a hit, too, according to Brad Klontz, a clinical psychologist and certified financial planner, and founder of the Financial Psychology Institute. If you defined yourself by your occupation, shedding that job title can be frightening.

"The biggest challenge is you feel like you've been thrown out of your tribe or group," says Klontz. "It is identity, but it is even more affiliation. This is where you feel like it's a life-threatening situation, subconsciously."

This is why people may keep their job loss a secret from their spouse, family and friends. It also explains why some people don't make immediate changes to their budget -- it's too scary to tell your friends why you can't make it to dinner, for example. 

"Making financial adjustments doesn't happen as quickly as it should because you tell yourself you'll find a new job and it'll be fine," says Feigs. "But maybe it won't happen soon and you use credit as a way to keep the lifestyle moving."

And if you can't afford your credit card bill after bridging those gaps, you'll end up in debt, which can only add to your stress.

Feigs lists self-blame and guilt as common emotions consumers go through. They beat themselves up for circumstances that may have been out of their hands, such as restructuring or downsizing at a company or a major downturn in their industry.

These emotions may be heightened if the person tied their self-worth solely to being the breadwinner at home and boss at work instead of other traits such as being a good friend or family member.

"It's a grieving process whether you lost your house or a job -- you weren't expecting this, you had a course laid out and you go through the loss process with denial, anger, bargaining and acceptance," Klontz says.

How to pick up the financial, psychological pieces
Understand that adjusting to your new economic reality will be a process. Start by getting  your family involved. If you're in a marriage or similar serious relationship, you may find that relationship tested.

"It's a dangerous time in relationships, depending on what point in life you met each other and what the understanding was," Klontz says. "It can cause a lot of stress."

But honesty is key to a healthy relationship, so don't hold back. You may find your stay-at-home partner is willing to take on a job, or that you just feel better taking the next step together.

For kids, it's all about how you deliver the news, Feigs says. Don't scare them into thinking they won't have safety or security -- tell them you have the situation under control but challenge them to chip in. Klontz says parents would be surprised to see how industrious kids can get in coming up with ideas about how to scale back.

Finally, you may be able to use your setback as an opportunity to wipe the slate clean. Klontz has seen clients hang onto careers that made them incredibly unhappy, simply because the jobs maintained their escalating lifestyle expenses. Without these constraints, you may be able to think of options that are more fulfilling to you.

"For some people, it's the best thing that ever happened to them," Klontz says. "They were in this position where they had golden handcuffs and built their lives around it. After, they may take a lower paid job, doing work they love and spending more time at home. Make a conscious decision that it doesn't have to be the end of the world."

Proactive preparation
If you're living a lavish lifestyle, be prepared for the worst. Crunch the numbers so you can see if your household could survive on a single income, and build up emergency savings.

Also, try not to upgrade your living standards whenever you see a spike in your paycheque, though it can be hard, as it's a knee-jerk reaction.

"You have to be cognizant and the best antidote [to constant upgrades or keeping up with the Joneses] is to write down your goals and what you're trying to prepare for, whether it be job loss or retirement," Feigs says."The biggest problem people have is not being able to see far enough in the future."

See related: Are unpaid internships wise if you have debt?, 7 tips for staying out of debt when unemployed, Will a higher income solve debt problems?
Published June 23, 2015

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