Managing the Financial Impact of Unexpected Job Loss
Rarely a day goes by that you don't hear about some company that has down-sized or closed its doors. It's a sober economic reality.
You may not be able to control if or when your company decides to make some cuts—but you can plan ahead and take steps to manage the financial impact of those events.
If you know the
benefits your employer
provides, you will then
know what you'll need
to supplement in the
event you lose your job.
From the very first day you begin working, build a sound financial foundation. Start with these steps:
• Build an emergency fund. Save enough to completely cover 3 – 6 months of expenses. Keep it in a savings account or other safe place where you do not incur investment risk and where you can have immediate access if you need it.
• Develop a budget. Know how much comes in and what goes out. Set an amount to save from every paycheck. Try to save at least 10 percent of your salary. Make deposits to your savings account on a preset schedule. Over time, the amount you save will add up.
• Contribute to your company's retirement savings plan. Try to contribute at least the amount matched by the company. The match is additional money working for you. Start saving as soon as you are eligible to do so. Tapping retirement savings to weather a job loss should be a last resort, but can provide a financial cushion if other savings run dry.
• Avoid taking out loans against your 401(k) or other retirement savings. Loans put a drag on your retirement savings by reducing the amounts invested on your behalf. In the event of a layoff, 401(k) rules generally require that employees pay back loans within 90 days of leaving or face both income taxes and a hefty 10 percent penalty tax on the withdrawal. You should inquire whether your plan would allow for partial loan payments during the 90 days if you will not be able to pay the full amount in one payment.
• Understand your company's benefits. If you know the benefits your employer provides, you will then know what you'll need to supplement in the event you lose your job. Start by understanding your health benefits. You may have several options to continue coverage during a period of unemployment. You may be eligible to get health insurance at group rates from your former employer under COBRA—a federal law that typically entitles you to continue your employer's coverage for up to 18 months. Also get to know your company's retirement benefits. Ask for the summary plan description (SPD), the document that contains a complete description of the benefits owed to you and how they are calculated. Your company's human resources department, the plan trustee or administrator, or your labor union should have a copy of this document.
• Use credit wisely. There are times when it makes sense to incur debt. Remember, however, that it needs to be part of your budget planning.
Tips if You Lose Your Job
Whatever the reason for your job dislocation, you now face a period when handling your finances correctly will be critical to you and your family. These tips can help you take charge of your financial situation:
• Act quickly to reduce spending. With less money coming in, you should take immediate action to reduce spending wherever possible. Resist the temptation to buy on credit.
• Assess your short-term situation. Figure out how much cash you have readily available or can get on short notice, how much you owe—mortgage, rent, credit cards, car loans—and the monthly payments associated with those and other debts. Establish how long you can make ends meet on the financial resources that you already have in hand.
• Ask about dislocated worker services. Your employer may work with state and local officials to provide services such as job placement, retraining or resume writing. Maximize your opportunity to get a new position as quickly as possible by taking advantage of these services—make finding a new job your full-time job. If you belong to a labor union, also ask your union what it can do to assist you.
• Inquire about unemployment insurance. A representative of the state's unemployment insurance office can tell you whether you qualify for coverage, and how the insurance may be affected if you get other payments from the company. Knowing how much you can claim and how long you can expect to receive unemployment benefits will help you handle your finances. When you file for unemployment insurance, state regulations generally require that you also register with the state's employment service so you can start looking for a job immediately. Collecting unemployment benefits while working is illegal. You must report to your state's unemployment office the date when you begin to work, either full time or part time.
• Take advantage of flexible spending accounts (FSAs): If you have enrolled for a health or dependent care FSA and the coverage period has begun, consider spending the money while still employed for items or services you'll need when unemployed. IRS rules allow you to withdraw the full amount you elected to contribute at any time during the coverage period. Check with the IRS for a list of expenses that qualify for tax-free use of your flex funds.
• Get financial advice. Your company or union may offer guidance regarding the financial decisions you face. Your state or local employment agencies may also provide information. Ask questions as early as possible to help determine what is right for you. Consider working with a credit counselor or financial professional who can help you develop a plan to see you through your unemployment period and beyond. FINRA offers information about how to find and work with a financial professional.
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