Financial Survival After a Job Loss
You may have lost your job already, or it's something you're
concerned about. Either way, the keys to surviving a job loss financially are
to plan ahead, take stock of your income, and cut your expenses.
If you haven't been laid off, it's a good idea to plan ahead
for that possibility. It's hard to know how long you'll be out of work, so to
be on the safe side, prepare for at least six months of unemployment. You might
find a job much sooner, but you don't want to be forced to take the first
opportunity that comes along, especially if it isn't suitable.
Come up with a financial plan for unemployment, and design
your plan with some flexibility to allow for adjustments if your situation
changes. Circumstances can vary based on how long you're out of work, and
whether unanticipated expenses arise while you're unemployed.
Prepare a survival budget
A big part of your unemployment plan is a survival budget.
Start with a list of all your income and expenses. You might already have a
budget that you can use as a base, but your survival budget should be a
bare-bones version of your regular budget. Include only expenses that are
necessary. The goal of your survival budget is to have a good idea of what
income you need to actually survive.
Your plan also should include an emergency fund that's
equal to at least six months of living expenses from which you can draw to
supplement other sources of income. If you haven't set up an emergency fund,
you may still have time to do so. You'll be amazed how fast you can deplete
your regular savings if your unemployment lasts more than a couple of weeks.
If you lose your job, find some income
Start by checking with your former employer. Are you
eligible for severance pay? Whether it's available depends on your employer's
policy, but if you're offered severance pay, you might have the option of
taking it in a lump sum or as a continuation of salary for a fixed period of
time. Taking severance pay in a lump sum gives you control over your money, but
you may lose some employee benefits such as group health insurance. If you take
your severance as a continuation of salary, you may be able to keep your
benefits, but you'll be dependant on your former employer's ability to make
payments to you.
But don't stop there. Check with your local unemployment
office to find out if you're eligible for unemployment benefits. You can
receive at least 26 weeks of benefits (more in some cases). Generally, to
qualify for unemployment benefits you must have been laid off. You may even
qualify if you've been fired, so long as it's not for misconduct. You probably
won't qualify if you quit your job, however.
Reduce your expenses
If you're unemployed, you may find that your income won't
support your current expenses. Aside from reducing your debt by selling
big-ticket items like your car or house, there are other things you can do to
minimize your living expenses.
One of your first considerations should be to identify and
discontinue discretionary expenses. Such items as magazine subscriptions,
health club memberships, extra phone services, credit cards you don't use that
have an annual fee, dining out regularly, and extra pay services on your cable
television are examples of some of the expenses you can trim from your budget.
You also may have to put off that planned vacation until you're back on your
Talk with your creditors
Another way to cut your expenses is to try negotiating
with your creditors to lower interest rates on your credit cards, defer a
payment or two on your car loan, or reduce your monthly payments temporarily.
You also may be able to lower your home mortgage monthly payments by
refinancing to a lower rate (if you can qualify in spite of your job loss), or
by negotiating a longer repayment period. You'll have to admit that you're
facing some financial difficulty due to your job loss, but if your credit is
good, now's the time to make the calls--not when you fall behind in your
Along those same lines, check with your mortgage company
or credit card companies or look at your billing statements to find out if you
have credit insurance. Credit insurance will make your bill payments when
you're unemployed. However, you may have to wait a while before receiving
While technically not an expense, you can also decrease
your spending by reducing your contributions to retirement or education funds.
However, the less you contribute now, the less you'll have for retirement or
college, so this option should be a last resort. But you might be able to make
up for the reduction in contributions by increasing payments to those funds
when you're back on your feet financially.
Increase your income
You've cut your expenses and spending as much as possible,
but you still don't have enough income. Here are some ideas that might help you
meet your expenses while unemployed.
Consider a part-time or temporary job. This will provide
another source of supplementary income while you search for your next full-time
job. And your part-time job could turn out to be your next full-time job--or at
least it might lead to another opportunity with another potential employer.
Also, your spouse or partner may be able to get a job if he or she is not
already working, or pick up more hours at a present job.
Another income-generating option is borrowing from the cash
value of your life insurance policies. But you'll be limited as to how much you
can borrow by the amount of cash available and other policy restrictions. And
you'll be charged interest on the borrowed funds, so if you don't repay the
loan, it can reduce your death benefit or even cause the insurance to lapse.
If you're really strapped
Your home is another source of savings you may be able to
tap into. If you have enough equity in your home, sometimes you can obtain a
home equity line of credit even if you've lost your job.
You'll only pay interest on the portion you use. But you'll still have to make
a monthly payment, so make sure you're able to afford the new loan payments
before you put your house on the line.
If you're still strapped for cash, consider withdrawing
from your tax-deferred retirement accounts, such as your IRA or
employer-sponsored retirement Any money you withdraw from these types of
accounts likely will be taxed as ordinary income for the year in which you make
the withdrawal. Also, you may have to pay a 10% penalty tax for early
withdrawal if you're under age 59½ unless an exception to the penalty applies.
If you're considering taking funds from your IRA or
retirement plan, you should consult a tax advisor regarding the specific tax
treatment of your withdrawal, because not all of it will necessarily be
taxable. For example, if part of the withdrawal from your traditional IRA or
employer's retirement plan represents nondeductible contributions, you may not
be taxed on that portion of the withdrawal.
If all else fails
If money really starts getting tight, be prepared to take
more drastic steps. You might consider moving from your home and renting it
temporarily. Obviously you'd have to find cheaper alternative housing, but the
rental income from your home may be enough to cover your rental expenses while
your tenants pay for most of the home costs, such as utilities and even real
estate taxes. However, any decision you make in this area should be made with
careful consideration, and only after evaluating how much you can actually get
out of the deal.
As a last resort, you may have to consider selling bigger
items like your car or even your home. Since these larger possessions usually
carry a debt, by selling them you're not only generating some cash, but you're
decreasing your expenses by ridding yourself of the debt attached to the item
All is not lost
A job loss is not the end of the world, even though it may
feel that way. Mapping out your priorities and drafting a bare-bones budget can
help you come up with your own financial strategy for job loss survival.