For the last 6 years the Federal Reserve Board has been conducting an annual study to assess the economic well-being among U.S. households. While there have been economic improvements felt generally by respondents over time, the latest (2019) study shows that 40% of respondents report that they wouldn't be able to cover an unexpected expense of $400, without borrowing or extending their credit card payments beyond the current month.1 When it comes to financial preparedness for a more significant setback, like the loss of a job, only 50% of the respondents indicated that they had savings to cover three months worth of living expenses1. To underscore this point, a recent survey of more than 5,000 Americans reported that 58 percent of respondents had less than $1,000 in their savings account.2 Yet time and time again, it’s been recommended that we should all have an emergency or rainy day fund that covers at least three months worth of living expenses. Most financial planners would recommend six months of savings for married couples.
Saving money is tough, but you and your finances need to be prepared in case of a sudden job loss that significantly reduces or diminishes your income stream. Below are six things you can do immediately to keep your finances on track when you suspect a layoff is coming, or you have just been let go from your job.
Step #1: Apply For Unemployment
According to the Department of Labor, every state handles unemployment a little differently. But for most states, you can apply online for unemployment compensation. If you are eligible for unemployment, it’s important to get your application in right away because there may be a waiting period before you begin receiving compensation. While eligibility differs from state to state, unemployment is typically for those who can prove or have their employer verify they were laid off, not fired for cause.
Step #2: Negotiate Your Severance Pay
When you are in your boss's office and he is breaking the news to you, negotiating your severance pay is likely the last thing on your mind. But before you sign anything, take home your severance pay contract and give it a thorough read. Reference your employee guideline or handbook to ensure you’re receiving the benefits that were outlined when hired, and reach out to any former employees to compare severance compensation packages.
When negotiating your severance pay, think about what it is you believe deserves to be compensated fairly. For example, you may have picked up and moved across the country for this job, or you spent years developing a new team or major project. Use the value you brought to the company as leverage for more compensation.
Step #3: Assess Your Retirement Plan Options
While working, you may have been saving money in an employer-sponsored 401(k) or 403(b) retirement account. When you leave your place of employment, you have a few options in regards to what to do with that money. The two options you’ll likely want to consider are either transferring the money to a rollover IRA or Roth IRA, or you may have the option to keep the money in your current employer’s account. While it depends on the employer and the plan, the second option is usually offered to those with accounts that have $5,000 or more in them.
You do have a third option, which is to take the money directly out of the account without rolling it over. This, however, is usually not recommended as it can increase your taxable income for the year and accrue penalties.
Step #4: Create a Spending Plan
When you’re left with no source of income for the foreseeable future, you need to reassess your day-to-day spending. In an ideal world, you’d want to be able to pay for all expenses without tapping into your savings account. This would include utilizing severance pay, unemployment compensation, insurance such as mortgage unemployment insurance, and emergency funds.
Start creating a revised spending plan by looking back at the last six months to a year of your credit cards and checking accounts. This will give you a good idea of your typical spending habits. From there, you can begin identifying areas in which you can work to cut back on- eating out, entertainment, cable bills, vacations or weekend trips, etc. This will also give you a good idea of how much you spend on essentials and what you can expect to be spending monthly while unemployed.
Step #5: Avoid Making Drastic Changes
Going from a steady stream of income to nothing is a shock to the system. And if your first instinct is to take some drastic measures to create new income, you’re not alone. But if at all possible, avoid the temptation to make big changes such as selling your house, adjusting your investment portfolio or draining your retirement savings. These are all important aspects of your financial picture that are designed to provide you long-term streams of income, meaning they shouldn’t be compromised because of a short-term issue. For instance, you may only be out of employment for less than a year, and you wouldn’t want to affect the income source of your 20- or 30-year retirement because you panicked over a relatively short period of unemployment.
In some instances, if you’ve exhausted all other options, then taking more drastic measures to secure income may be appropriate. If possible, speak with your trusted financial professional before making these larger financial changes.
Step #6: Start Supplementing Your Income
If you didn’t have a side hustle before, this could be the time to start. While you’re actively looking for a new job, focus on finding other ways to supplement your income. Doing so can help you pay your monthly expenses without tapping into your savings account. Find a part-time position working somewhere that aligns with your interests, offer freelancing services, sell valuables online or even rent out unused space in your garage or residence.
In the meantime, let everyone in your business and personal networks know you are open and available to new job opportunities and take the time to reassess or rewrite your resume.
Being let go from a job can be one of the worst experiences to go through. And while your emotions are likely running high, it’s important to remember that this is often a temporary bump in the road. Even if your savings account isn’t where it should be, there are steps you can take now to help ease the burden, keep debt at bay and help you get back on your feet.
Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.