Losing a job is a high-stress event, but what comes after can have long-term ramifications for both your mental state and financial situation. The best plan is to have a plan. Whether you are recently unemployed or recognize this is something that could happen in the future, here are some guidelines to help minimize the financial impact of unemployment.
Often enough, when we lose a job it comes as a sudden shock. If we have more time to plan, to get used to the idea, we can be more prepared — both emotionally and financially. That’s why it’s a good idea to consider the loss of a job a constant reality, just like we know we want our children to go to college and we plan to retire one day.
Devising a financial plan for job loss isn’t much different. The more prepared we are, the less likely we are to be caught off guard or suffer long-term consequences. The following are tips to help you create a pre-emptive plan:
- Save an emergency fund equal to three to six months of household expenses.
- Try to maintain low or no credit card debt (use a credit card but pay off the balance every month).
- Maintain a good credit score.
- If you own a home, it may be a good idea to have an approved but unused home equity line of credit (HELOC).
- Establish a strong relationship with a financial advisor who understands your complete financial situation in order to provide trustworthy advice during both good and bad times.
Once you have these components in place, they can create a safety net to help cushion the fall of a job loss. However, despite preparations, a day may come when you need to adjust your financial plan to account for the lack of income for the foreseeable future. The balance of this report is focused on what to do once you become unemployed.
There are several areas in which you must proactively apply your skills. First, research whether you are eligible for unemployment benefits and, if so, how much you are eligible to receive and how long payments will continue. These factors vary by state.
For example, some states allow for benefits even if a worker is fired or quits voluntarily, depending on the circumstances. Eligibility regarding unemployment compensation can be found on the unemployment office website of the state where you live. As a general rule, payouts continue for a maximum of 26 weeks and equal 50 percent of earnings up to a certain limit. However, specifics vary by state. 1
Note that unemployment benefits are taxable and may take several weeks to start after you’ve applied for them, so it’s something you don’t want to put off.
If you were on your employer’s health insurance plan, another thing you need to apply for is a COBRA extension plan. Your former company is required to provide you with this information, but you also may want to shop for a health insurance plan at a marketplace exchange. Unemployment constitutes one of the exceptions that enable you to purchase a plan outside of the annual enrollment period. Be aware, too, that when you purchase your insurance plan from an exchange, it is yours to retain — you are no longer dependent on an employer to provide for your health insurance needs.
If you do not have a HELOC or an available credit card you can potentially tap for funds going forward, there may be a small window of opportunity to apply for one pending your job loss. For example, if you are given notice two weeks to several months ahead of time, you may be able to cite and verify your current income to qualify for these types of loan accounts.
One of the first things you want to do once your income is reduced or eliminated is establish how much money you need to live on. This means tracking and analyzing expenses to determine how much you must spend and where you can reduce spending. Even though your paychecks or unemployment benefits may continue initially, it is better to reduce spending as quickly as possible. Any money you save now can be used to help defray costs once your income is reduced further.
Here are some ideas to help lower monthly household expenses:
- Stop dining out, and prepare meals at home.
- Consider canceling cable television (just keep internet service).
- Consider switching your cell phone contract to a cheaper “pay as you go” plan (as long as you don’t incur a contract cancellation fee, in which case you’ll need to figure out which is cheaper).
- Consider cutting ancillary fees, like canceling a gym or YMCA membership and start working out at home or a local park.
- Cancel monthly subscription services.
- Eliminate regular perks, like gourmet coffee runs, hair salon appointments and shopping sprees.
- Get creative — make homemade items for birthday and holiday gifts.
If you’ve prepared well, hopefully you won’t need to go into debt during a period of unemployment. However, if you’re carrying debt when you lose a job, one thing you might consider is contacting creditors to make arrangements to temporarily reduce payments, including credit cards and auto lender, mortgage company and personal bank loans. It’s best to be honest about your situation and prospects for future income. This is a situation in which a strong, long-term, timely payment record and good credit score will work well in your favor.
How successful you are will depend on your financial situation, policies and tendencies of creditors, and how well you present your case. Bear in mind that the goal for creditors is to get paid, so they may be willing to reduce or defer payments or tack on interest to the back end of a loan rather than have you default.
Finally, recognize that you may need to rely on borrowed funds during your period of unemployment. It is a good idea to evaluate the credit cards you own and determine which are the best to use in terms of interest rates charged on purchases and cash withdrawals. If you have monthly debt, it is very important that you find a way to pay at least the minimum due each month.
If you have an investment portfolio, you should consult with a trusted financial advisor as to whether you should tap investment funds for cash to stay afloat. There are many factors to consider, such as income taxes, capital gains and early withdrawal penalties.
Some investment accounts are better for withdrawals than others. For example, while a Roth IRA is earmarked for retirement, the investor makes contributions with taxed income. This means he can withdraw his contributions tax- and penalty-free at any time, for any reason. Only earnings are subject to a tax penalty under certain circumstances, but they are considered withdrawn last.
However, it’s also worth noting that some investments may be poised for higher gains while others have already achieved gains. This analysis could create a scenario in which a withdrawal is basically a way to rebalance your portfolio. Or, selling certain shares could provide cash while at the same time constitute a loss on paper, which you can claim as a capital loss to offset income taxes.
Again, it’s wise to consult with your investment and/or tax advisor before making any moves.
Bear in mind that if you pick up a temporary job for income while looking for another full-time position, you won’t be able to collect unemployment benefits at the same time. This is a good reason to apply for unemployment as soon as possible — since you may want to look for a part-time position down the road.
Thanks to the “gig” economy, you may be able to use contract work to keep income flowing. If it seems feasible, you might ask the employer you just left if you can continue doing your job on a contract basis. If not, offer your skills and expertise to a competitor.
Or, consider other jobs that can help bring in income without hampering your job search, like bartending or waiting tables at night.
If health insurance is a priority, consider employers that offer coverage to part-timers, such as Starbucks, Whole Foods, Lowe’s and The Home Depot. 2
Other ways to earn money include selling items, starting a service business like cleaning, child care, etc., or becoming a driver for Uber or Lyft.
“A little financial planning may keep you from having to settle for a job you don’t want simply because you’ve run out of money.” 3
One thing that can sabotage your finances quicker than anything is getting discouraged. Fight negative feelings that can lead to anger, self-doubt and even compromised personal relationships. The ways to combat these feelings do not have to cost much — such as regular exercise, eating healthy, spending quality time with friends and family, and taking time for yourself.
The time between jobs also enables you to take stock of your career and figure out what you want to do next. The more control you exert over your life, the better you’ll feel. Creating a financial plan and career path can provide a strategic road map to help you get back on track without losing ground on your long-term financial goals.
1 Allison Doyle. The Balance. Aug. 10, 2017. “How to Claim Unemployment Benefits.” https://www.thebalance.com/how-to-claim-unemployment-benefits-2058799. Accessed Feb. 21, 2018.
2 Ginger Dean. Forbes. Dec. 30, 2017. “10 Companies That Offer Health Insurance for Part-Time Workers.” https://www.forbes.com/sites/gingerdean/2017/12/30/10-companies-that-offer-health-insurance-for-part-time-workers/#5893800364b8. Accessed Feb. 21, 2018.
3 Lee Miller. Monster. “Laid Off? Six Steps to Manage Your Finances.” https://www.monster.com/career-advice/article/manage-your-finances-when-unemployed. Accessed Feb. 21, 2018.
Article provided by AE Wealth Management for Safe Harbor Financial Services.
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