Preparing for Job Loss

It happens. Companies eliminate positions and, regardless of your personal performance, you find yourself without a job. How do you prepare for such a situation? What can you do when it happens?

How to Prepare

As part of your financial plan, you should prepare for the potential loss of a wage earner's income. This can happen due to a company closing, downsizing, or reorganizing. Regardless of the reason, the impact is the same. To help ease the hardship of reduced income until you are able to find another job, you should do the following:

1. Maintain an Emergency Fund.

At all times, you should have enough dollars in an account to provide for three to six months of living expenses. These funds should be readily available from a savings or money market account. This fund will enable you to meet the family's living expenses while you look for another job.

2. Don't live Paycheck to Paycheck.

Maintain your lifestyle at a level that will allow you to save some amount from each paycheck. A good goal is to save 10% of each paycheck through either your employer's retirement plan or your personal investment account. In the event you lose your job, the saving may have to stop, but your Emergency Fund and other resources will be able to meet your basic living expenses for a longer period of time. If your family has two wage earners, try to provide for all basic living expenses with one income. Then if one person loses their job, you can continue to meet your living expenses without a great deal of hardship.

3. Keep Debt to a Minimum.

The less debt you have the easier it will be to adjust to a lower income. Your home mortgage and a car loan may be necessities, but personal or home equity loans to purchase luxury or "lifestyle" items should be avoided. It is better to save and purchase such items with cash.

4. Pay off your Credit Card Balance.

Always pay off your credit card balance when due. Then, as a last resort during your unemployment, you can allow your credit card to provide funds for the necessary items.

What To Do?

If you lose your job, you will need to consider the immediate decisions that will be required concerning your employer's benefits and the family finances.

1. Who should look for a job?

If you have a two-income family and you have managed your finances well, the urgency to find a job may be lessened. You may have the luxury of being patient with your job search. If you have only one income and the other spouse is a "stay at home" parent, you may need to decide who has the greater potential for finding a position. It may be advantageous to trade roles within the family for a period of time.

2. Severance Payments.

You may receive a severance payment as either a lump sum or as a continuation of your paycheck for a period of time. If you receive a lump sum, it is important that you put it into your reserve fund to provide for future living expenses. Do not make the mistake of using it for a major "non-necessity" purchase, thinking you will find a job in a short time period.

3. Employer Retirement Savings Plan.

You can rollover your 401(k) or other qualified employer savings plan to an IRA Account. If you have an outstanding loan from your 401(k) plan, you will need to pay the loan off prior to the rollover. If you do not, you will be required to pay tax and penalty on the outstanding balance as if it were a distribution instead of a loan. Once in the IRA, you can withdraw funds without a penalty for medical and education costs.

4. Medical Insurance.

You will lose your medical, dental, and vision coverage provided by your employer. By law, you are eligible for COBRA coverage. This means you can stay in the company medical plan for a maximum period of eighteen months, but you are required to pay 100% of the costs. This provision allows you to be covered temporarily while seeking other employment. If your spouse is working, the first option may be to have the family covered under his/her employer plan. Your other option is to secure personally owned medical insurance, which is generally more expensive than an employer group plan.

5. Flexible Spending Plans.

Discuss with your employer the procedure for using any remaining pre-tax spending balance in your medical reimbursement or childcare accounts. Do not forget about your money in these accounts.

6. Job Placement or Training Services.

Take advantage of any job placement or training programs that are available through your employer. The more you participate in the process, the greater the number of opportunities and the easier your search will be for a new position.

Manage your Finances

With a reduction in family income, you need to immediately control your spending. Develop a basic "bare bones" budget that will stretch your remaining income as far as possible. If you anticipate being without an income for longer than a few months, you may need to consider downsizing to reduce housing costs. Obviously, you will need to reduce or even eliminate any regular savings with the commitment to resume your savings habit when you have replaced the lost earnings.

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You may also find it necessary to replace life insurance that was being provided by the employer. Life insurance represents security for your family in the event of your death. You should immediately consider a term policy to meet at least the minimum level of required coverage.

No new debt unless it is absolutely necessary to meet basic living expenses! Look to your other sources for funds first, such as the Emergency Fund, the cash value in a life insurance policy, or investments. If you must borrow money, consider a home equity loan.

Summary

Make sure you have a contingency plan in place that will answer the question, "Where will I get money for living expenses if I lose my job?" The best time to consider this question is while you have a job and the resources to put aside the necessary savings. Manage your finances by tracking your cash flow and understanding where you can reduce or eliminate discretionary spending if that becomes necessary. Taking the appropriate steps now will allow you to fare well through the lean times and experience a quicker recovery.