The U.S. unemployment rate hit 8.1% in February after 651,000 jobs were eliminated, according to last week’s announcement by the Bureau of Labor Statistics. With a huge array of companies eliminating positions, almost everyone has at least considered the possibility that their job could be the next to go. Preparing for a worst-case scenario means you need to have a game plan for your finances ready to go in case that dreaded pink slip arrives on your desk.
Planning ahead means setting aside cash in an emergency fund. But here are a few tips on how best to manage your finances after a job loss:
1. Take stock: One of the first things to do is to take stock of where you stand financially. "Even if it's on the back of a napkin, write down what you have in cash, in your investment accounts and your retirement plans," says Daniel D'Ordine, a certified financial planner with New York City-based Life and Wealth Planning. "Next look at your debt, and really identify what are your absolutely non-negotiable expenses and what are flexible expenses."
2. Use cash for essentials: If you’ve planned ahead and saved your cash in an emergency fund, it can be hard to start spending it. But losing your job does constitute an emergency, and that money was intended for essentials, such as rent, groceries and utilities. D'Ordine advises first starting with liquid cash reserves such as savings accounts or money market accounts, before moving on to any money you have locked up in a certificate of deposit (CD). "CDs are still just another type of cash," says D'Ordine. "You don't have to liquidate all of your CDs on day one, but don't be afraid to cash them in, even with an early withdrawal penalty."
3. Use credit for non-essentials: An emergency is no time to head out and buy a new flat-screen TV, but there may be times when non-essential spending, such as eating out at an affordable restaurant, might be required to maintain a positive outlook in what is often a very difficult time. In that case, D'Ordine suggests using credit cards to foot the bill for non-essential expenses. That way you can keep track of your spending while avoiding spending cash earmarked for your essential expenses.
4. Look into alternatives: In an ideal world, you'll have enough cash saved up to see you through the brief period in between employment. But in case your unemployment extends beyond your cash reserves, you'll need to know what alternative sources of cash you can liquidate or borrow against. "Some 401(k) plans do have loan provisions such that you are effectively borrowing from yourself," says D'Ordine. "You'll need to pay it back, but you're not paying the 50% income tax and penalties that you'd incur by withdrawing instead of borrowing the money." Insurance policies are another potential asset that consumers can borrow against. Knowing your options before you need them can help you prepare for a longer-than-expected period of unemployment.
5. Track spending: Check in on your finances at least once a month to see how your cash reserves are holding up against your spending. If you are burning through cash too quickly, reconsider some of your essential expenses and see whether you might be able to do without them, such as a second cell phone, extra channels on the cable TV package, or a landline phone. By carefully managing your finances, you'll stand the best chance to make it through to that next job.
There’s more to it. Figuring out what to do with your health insurance and unemployment benefits are important post-layoff steps that must be taken quickly. But these tips will help ensure your spending stays on track while you’re on the hunt for a new job.