Money milestones: financially preparing for a future job loss

The best time to protect your finances from the possibility of losing your job is when you’re still employed.

Published July 8, 2021|9 min read

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No matter how valuable you make yourself to your employer, there’s no way to guarantee you’ll never lose a job. Your employer could reorganize, your position could be outsourced, or a pandemic could batter the economy. 

Being prepared for a potential job loss can provide you with enough money to fall back on in case the worst happens. Even if you never lose your job, this can lead you to be more intentional with your money, said Drew Feutz, certified financial planner at Market Street Wealth Management Advisors

“Having a solid grasp on your cash flow is an important part of leading a successful financial life and can be especially important to help prepare for a job loss,” he said.  

The best time to protect your finances from the possibility of losing your job is when you’re still employed. Here’s how to financially prepare for a future job loss. 

1. Create a budget

Whether you're steadily employed for the rest of your life or you have periodic job losses, having a budget that tracks your income and expenses will be extremely valuable. With a budget you can understand your finances and track and manage your spending while working toward your financial goals. 

Establishing a budget now can help you navigate a future job loss and budget in between jobs. You’ll be able to easily revisit your budget and adjust it to reflect a change in your income if you lose a job. You can also quickly identify expenses to eliminate entirely or areas where you can reduce spending. Making adjustments to an existing budget after a job loss will be much easier than creating a budget from scratch. 

All you need to create a budget is a simple spreadsheet where you can plug in your on-hand cash, income, savings and monthly expenses. As time goes by, you should periodically review your budget and make updates. 

2. Save for emergencies

An emergency savings fund can help you pay the bills during a period of unemployment, and the best time to save for a future job loss is while you’re still employed. A common rule of thumb is to save at least three to six months’ worth of expenses, but you may want to save up to a year.

How much you actually need will depend on your monthly expenses, which your budget can help you figure out. For this purpose, you don’t need to save for discretionary items like dining out or entertainment because these should be the first budget cuts you make when you lose your job. If saving for months of expenses seems impossible, remember that something is better than nothing. You can start by adding a small line item for emergency savings in your budget, and setting up automatic transfers from your checking account to your savings account. 

“It will take some time to accrue three to six months’ worth of expenses, but it’s important to figure out how much you need for your specific situation and get started,” said Feutz. “If you can’t save that much, then just do what you can. You can look for ways to cut back spending or increase your income to increase your savings goals.”

Where should you put your emergency savings? 

Finding the right place to park your emergency savings will require a balance between growth and accessibility. Ideally, you want your emergency savings fund to earn a greater return than it would if you were simply stashing cash beneath a mattress. You‘ll also need quick accessibility to your money in case of emergencies. Ideally, you should keep it separate from your regular spending money so you aren’t tempted to dip into it. 

While traditional savings accounts are easily accessible, their low interest rates won’t keep up with inflation. High-yield savings accounts can earn more over time, those rates have tumbled in the last few years. Another option is a money market fund,  a pool of short-term bonds, certificates of deposit and other low-risk investment options. These funds are less risky and can be accessed quickly, usually without penalty.

“Money in an emergency fund is supposed to be safe in case you need it quickly. This means that a boring checking, savings, or money market account is probably the best place to store the cash,” said Feutz. 

For a slightly different perspective, some people argue that you should invest instead of saving because there is much greater earnings potential on the stock market. But investments aren’t as easy to access when you have a true emergency, and if the market is in a downturn you could actually lose money when you pull it out. You may even end up having to put emergency expenses on a credit card, which could quickly get you in hot water. 

“Some people will become frustrated in low interest rate environments like we’re in today, but it’s important to remember that reward (higher returns) come with risk,” said Feutz.

3. Make sure you’re covered by insurance

When it comes to job loss, there are several specific types of insurance you need to be aware of.

Job loss insurance

Job loss insurance is an optional insurance policy that you can purchase to supplement your income for a specified period of time when you lose your job (as opposed to government unemployment benefits, which we’ll discuss later). There are two main types of job loss insurance you can sign up for before a job loss:

  • Supplemental unemployment insurance covers your bills and expenses when you’re out of work. 

  • Job loss mortgage insurance will pay your mortgage payments for a set period of time  (usually six to 12 months)  after you lose your job. 

These policies typically don’t provide coverage if you quit, retire or get fired for misconduct. The cost of the policies can vary depending on factors including your salary, location, industry, and how much coverage you need. Before you start researching policies, check to see if you already receive any of these benefits from your employer or union. 

This type of insurance will cost you extra and it won’t cover you in certain situations. It's a good idea to prioritize an emergency savings fund before you start looking at optional job loss insurance.

Disability insurance

Don’t ignore the possibility of illness or disability. If you become sick or injured and have to miss work, disability insurance can help you pay your bills. Disability insurance comes in two types:

  • Short-term disability insurance lasts from a few months to a year. It is usually only affordable through an employer, so check if you already have a policy at work.

  • Long-term disability insurance won’t kick in until your short-term disability benefits are exhausted, but they can last until retirement. These are optional policies purchased through a broker. 

Having proper disability insurance coverage in place is important to protect yourself and your family, said Feutz. “A lot of people buy life insurance to protect their loved ones in case something were to happen to them. But anecdotally, I have not found as many people are worried about becoming disabled.” 

Government unemployment insurance 

Also known as unemployment benefits, unemployment insurance is the program offered by your state that provides cash benefits to unemployed workers. Every state offers unemployment insurance to eligible residents. There are federal standards, but eligibility requirements and program details vary between states.

In most states, eligible workers can receive up to 26 weeks of benefits, as a percentage of previous income, up to a certain limit. Requirements may include that you became unemployed through no fault of your own, and that you seek new employment during the time you receive benefits. 

While you don’t need to worry about applying for unemployment before you lose your job, it doesn’t hurt to familiarize yourself with how unemployment insurance works in your state. You can look up your state’s unemployment program here

Health insurance

If you receive health insurance through your employer, it’s important to know if you are eligible for COBRA coverage if you lose your job. COBRA stands for Consolidated Omnibus Budget Reconciliation Act, and is a program that lets you keep your employer’s health insurance plan when you leave your job, whether you left voluntarily or you were terminated, for 18 to 36 months depending on the event that led to your job loss. 

The big issue with COBRA coverage is that you’ll be responsible for paying for the plan yourself. The cost could be restrictive and you might be able to save by declining COBRA and signing up for health insurance on the marketplace

It’s a good idea to understand if you’re eligible for COBRA, the types of life events that qualify you for it and what the cost of your plan would be if you lost your job. Here’s a guide

4. Diversify your income 

Coming up with alternate sources of income can protect you from job loss because you won’t be solely dependent on your primary job for income. You could get a second part-time job, rent out a room in your home or start a side hustle.

Any income you earn from taking on a tenant or starting a side hustle would affect the unemployment benefits you can receive when you lose your job. Some states don’t care if you work a side job or part-time job, while others will reduce your benefits based on how much you earn.

Here’s how to join the gig economy.

5. Pay down debt

No matter your future employment status, paying down debt is a good financial strategy. Debt accrues interest over time, so paying it down will save you money long term. Plus, less debt means fewer bills if you lose your job.

The best way to pay down debt depends on what works for you. 

  • The avalanche method is a popular strategy in which you pay your debts with the highest interest rates first to save money and reduce debt faster. 

  • The snowball method is another popular strategy where you pay off your smaller debts first, gaining quick victories as you knock out debts.  

Depending on the state of your current debts and emergency savings fund, it might make sense to take a hybrid approach to job loss prep. 

You can allocate some of your budget toward debt repayment, and allocate some toward emergency savings. This way you can slowly shrink your debt while also building up a cash reserve to cover your bills if you lose your job. 

Job loss is a risk that’s baked into employment. While there’s no way to predict the future, you can protect yourself from the unexpected by emergency prepping your finances. Take steps to understand your finances, build resources to draw from in case of emergency and have a plan to increase your income or reduce your debt. You’ll be more prepared if you ever have to unexpectedly leave a job.  

Recommended reading

Create a monthly budget using our simple spreadsheet

Three to six months’ worth of expenses might not be enough for an emergency fund. Here’s the case for saving for a whole year

Now that you’re prepared ahead of a job loss, here’s what to do with your money after you lose your job

Image: Getty | fizkes

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