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As unemployment numbers continue to rise, many employees are stressed about whether they’ll have a job next week or not. Some have already, some have already lost their jobs and are scrambling to find new employment. In this time financial planning is crucial. This is a time when people are feeling and are desperately in need of guidance. If you think that you are about to encounter a lay off, you need to be focusing your attention on what can be controlled: cutting expenditures, figuring out emergency funds, evaluating how to replace lost benefits, and making a game plan for the job search.
Finding Emergency Cash
For those that are still employed but the future of their job is uncertain, I would encourage them to have at least 12 months of savings in cash. Unfortunately many will not have enough. But if they’re still employed and the emergency funds are not there, tapping into their 401(k) might be a viable option. I know what you’re thinking. Tapping into your 401k usually goes against all that I stand for. And with this dismal market, it might be a dangerous move, but; if they become unemployed that option might now be available to them.
Typically if you’re still employed you’re allowed borrow up to half of your 401(k) balance, up to a maximum of $50,000. Running these numbers you can guesstimate the period of how long you think it will take you to find a new job and then how much you would need to borrow to get you by until the new job is made. If you borrow from your 401k while you are still employed then you avoid the 10% withdrawal penalty. Sure there is some speculation in this move, but if you’re in a high demand field you may be able to use this move to your advantage. Warning: If you do this, be sure to double check with your employer when you are due to pay it back. It tends to vary from employer, but it could be due back immediately, within 60 days or some period greater.
Don’t Pay Off The Debt
Another common misconception of after being laid-off is that most people want to take their savings or take their retirement savings and pay off debt, such as credit cards or even the 401(k) debt. But in this type of market, paying off debt should not be the priority especially if you are unemployed. The priority is to keep get your savings intact and making sure that you have plenty of cash on hand. Sure credit card debt is bad, but just focus on making the minimum payment until you get your job situation in check.
Crisis Budgeting
If you’re used to going to shopping every weekend or eating out every other night at fancy restaurants, then most likely those changes are just around the corner. You need to sit down and seriously hammer out a budget of things that you need and things that you don’t need. You may even consider working out two budgets, one for while you’re working and one for when you’re not working, so that way you can truly see how much you’re spending per month. And then, you can contemplate whether you can go on a cheaper cell phone plan, or cut your cable bill services. Sometimes adding that extra payment per month might not seem like a big deal, but $50 here and $50 there will surely add up, especially on a limited budget. Also, too, knowing which expenses you absolutely must be covered will help you realistically search for your future job.
Replacing Lost Benefits
In the aftermath of a job loss, people should take stock of what benefits have been lost, which ones you are entitled to by law, and which ones may be portable. how to continue health care coverage, especially if there are dependents. Typically, employees are eligible to keep the same coverage through COBRA for at least 18 months. But, they may have to pay 102% of the cost of their insurance premium. If there premium have been subsidized by their employer, then that cost will be a rude shock. COBRA can often be a good bridge choice, but it ends up being a health benefit. Families paying $200 a month for insurance under COBRA, it could be $1,000. Luckily, the government just passed new law concerning COBRA benefits that qualifying period will be only responsible to pay for 35% of the benefit. This comes at a time that should be very helpful to many that are facing layoffs ahead.
Many employers offer life insurance, long-term care insurance, disability policies and they may be portable as well. For another person or one who is not in good health, ability to take over the payments on existing $100,000 life insurance policy may save the worry of having to find another carrier. It’s better to keep it for a few months, although make sure they don’t need it, and drop it later.
Career Transitions
Many people will be forced by an unforeseen job layoff to reassess what they want in their lives and what is meaningful to them. They may have to craft resumes, cover letters for the first time in years, and feel at a loss especially if they are switching to a new career path, which is an unfamiliar field.
If you haven’t jumped on the social media bandwagon, it’s time. Consider Facebook, MySpace, LinkedIn, Twitter and other social media sites to reconnect with old networks and also create new ones. The more people that know your situation the better. Also, consider starting a blog to showcase your talents. Need a good blog for inspiration? Guess what, you’re already here. 
by Steve Rhodes
Amateur Asset Allocator: 5 Steps to Prepare For a Layoff
Securities offered through LPL Financial, Member FINRA/SIPC
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COBRA insurance is something I have never fully understood. I hope to never have to learn about it either.
Thanks for the tips Jeff. I’m seeing people around me drop like flies.
Good tips an never an easy situation to handle. Health insurance is probably the most important thing to make sure you can afford somehow. After that the budgeting begins, and there are prob certain areas to cut costs, but that can only buy minimal time.
Good list — the part about not paying off your credit card debt is pretty important. Take it from the companies these days that don’t have [much] debt, but would LOVE to issue some — *cash is king*. Definitely don’t get behind, since you won’t get any sympathy, especially now, but focus on keeping up to date with the minimums. I made that mistake once, and oh boy…
I found http://www.freeagentnet.com to be a pretty good place to start when I got laid off. It’s a group a people that are unemployed, so I’ve met a bunch of others and gotten some pretty good tips. Also some good info in the forums about stuff like unemployment, COBRA, etc.
Andrew’s last blog post..The Power of Ignorance, or, What an 8 Year Old Can Teach You About Risk
Just the thought of a layoff motivates me to put more money into my emergency fund. I’m so thankful I have learned about emergency funds over the years because I have a decent enough chunk of cash saved that if I ever lost my job I would at least have enough money to live life until I found a new job.
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I have to be honest, the 401k advice seems like bad advice.
If you borrow the money while you’re employed, you have to repay it to yourself within about 5 years, I believe. But if you lose your job, that money must be repaid within a few weeks of the layoff or else you have to pay the penalty and you will be taxed on the money.
(what I’ve learned from Suze Orman, so take from that what you will)
@ Dee Trust me, I agree. Even in my post I state, “This goes against everything all that I stand for”. I even have another post that says to “never borrow against your 401k”. But recently I’ve had a few clients that needed to tap their 401k after the fact and had to pay the 10% penalty. Had they known the rules, they could have borrowed the amount and saved the 10%.
You make an excellent point on paying back the loan. It tends to vary from employer. I’ve had clients that were told they had to pay it back immediately and others that had 90 days. So yes, definitely double check with your employer first. Because your comment, I just added a Warning message to the post. Thanks for the input!
We borrowed from our 401k years ago. We researched it carefully, and decided we would rather pay ourselves back at a lower rate of interest than owe a bank and pay higher interest. We paid it off with no problems. I agree that it shouldn’t be a first step, but there are times when it is a very practical step.
Another note on it – in this weird economy when many businesses are having problems, it might even be a way to protect your own money. I know one person who is still waiting a year after losing his job. The company still hasn’t given him his 401K and it is now worth much less than if he’d gotten it when he first left.
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