Money milestones: How to manage your money after a job loss

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Money milestones: How to manage your money after a job loss

Losing a job poses a major financial threat for most workers. Nearly 80% of American workers live paycheck to paycheck according to CareerBuilder. For them, a loss in income would immediately compromise their ability to meet financial obligations. Even when you have a financial safety net, a job loss can cause significant hardship.

In addition to starting the hunt for a new job, you have to get your finances in order to make up for a reduction of income. Here is how to respond financially to a job loss.

1. Understand your financial exit benefits

Some employers offer financial benefits to departing workers. Make sure you fully understand these benefits. If you can, refer to the employee handbook and check with human resources to get a full explanation.

While severance pay isn’t legally required, some employers do provide it. It’s typically based on your current salary and length of employment. The longer you worked there, the greater the payoff. Severance pay agreements may restrict you from taking legal action against the employer or working for a competitor, so take time to review the document if you can. You may also want to have a lawyer look it over.

Remember, accepting a severance package may limit or delay any unemployment benefits you can receive from the state.

Ask if you’re receiving a payout for any unused personal leave you have accrued. Depending on the state you live in, this may be legally required. Also make sure you understand what will happen to any employer-sponsored retirement accounts.

2. Understand your health insurance options

If you got health insurance through your employer, you need to make sure you can maintain coverage. The cost of health care is high, and insurance will help keep expenses lower while you’re unemployed.

If you like your employer’s health plan, you may be able to extend it through COBRA, which allows terminated employees to keep their employer-sponsored health insurance (most employers with 20 or more employees are required to provide COBRA coverage). However, you’ll likely be responsible for the full cost of the plan, plus a 2% administrative fee.

If that sounds too expensive, you can shop around for a more affordable plan. Policygenius can help you compare plans.

If it’s an option, consider getting on a spouse or family member’s employer-sponsored plan. It may be cheaper than finding a plan on your own.

3. Apply for unemployment benefits

Every state offers unemployment benefits, in the form of financial assistance, to eligible residents. While all states must follow federal guidelines, certain details vary between state programs. Eligibility requirements may include your previous income, length of employment and reason for termination.

Eligible workers can receive up to 26 weeks of benefits in most states and the amount you receive is a percentage of your previous income, up to a state-imposed limit. According to the Department of Labor, benefits are meant for workers who became unemployed through “no fault of their own.” If you quit or were fired for illegal misconduct, for example, you may be ineligible. You are also required to actively seek new employment while you receive benefits.

Any unemployment benefits you receive are subject to income tax, but they aren’t automatically deducted. You’ll need to elect to have them withheld by the state if you don’t want to owe at tax time.

4. Create your unemployment budget & cut expenses

Any good unemployment survival plan needs a budget and reduced spending to get you through the lean times. Here are the steps you must take to create a budget and cut expenses:

Create a budget spreadsheet

For obvious reasons, your budget will need major adjustments. If you already have a monthly budget that tracked your income, expenses, savings and discretionary spending, you will need to adjust it to account for your reduced income. If you don’t already have one, you can create one using our template.

The budget will give you a detailed look at your money coming in and going out, and will need to be tweaked and adjusted as you take steps to afford your new jobless reality.

Slash spending

Now that you’ve created a budget, you need to slash your spending. Eliminate any unnecessary expenses you can. Think gym memberships, streaming services, cable, dining out and paid recreational activities.

You’ll also want to work on lowering your bills and the cost of necessities. You can reduce your utility usage to keep monthly bills low, look for a cheaper cell phone plan or find more affordable insurance coverage. Plan cheap at-home recipes and stick to your list at the grocery store. Clip coupons and look for deals whenever possible.

Reduce or reorganize debt

Debt reduction or reorganization can help diminish your monthly payments, especially if you have several debts with high interest rates. Review all the options with your current creditors to get a handle on your cash outflow.

If you have too many high-interest debts to track, consider taking out a debt consolidation loan, which combines your debts into a single loan with a potentially lower interest rate and lower monthly payment.
If you have a high credit card balance, try shifting your credit card debt onto a new card with an introductory 0% balance transfer offer, which gives you a limited amount of time to avoid interest as you make payments.
Federal student loans can often be deferred on the basis of unemployment or reduced based on your income.

In the meantime, try not to rack up additional debt on your credit cards. While desperate times call for desperate measures, you don’t want to get yourself further into debt if you can avoid it.

Tap your emergency savings fund

If you have an emergency savings fund, unemployment is the perfect time to tap it. Try to avoid spending it all at once, and only take small disbursements when needed. After all, you don’t know how long it will take you to find a new job.

5. Start a side hustle

A side hustle could be a way to bring in cash while you look for a permanent position. You can sell your skills in a freelance capacity, drive for Uber or Lyft, walk dogs and more. You’ll supplement your income and avoid dipping into your emergency savings fund too much.

Remember, any income you earn from a side hustle may affect the unemployment benefits you can receive. Some states don’t mind if you work a side hustle or part-time gig while you collect unemployment. Others may reduce your benefits depending on how much money you earn. The best course of action is to check with your state’s unemployment office to determine the policy.

Looking for a good, inexpensive side hustle to start? Here are eight side hustles that cost nothing to start.

6. Roll over your 401(k) (but don’t dip into your retirement)

While retiring may be the last thing on your mind right now, you need to decide what to do with any retirement plans you had with your old employer. There are typically a few options for employer-sponsored plans:

  • If you have more than $5,000 in your account, you can leave your plan where it is
  • You can cash out your plan and use the money to help get you through unemployment (if your account balance is less than $1,000, the employer may force you to cash it out)
  • You can roll over your 401(k) into an individual retirement account

Generally speaking, you should avoid cashing out your 401(k) and other retirement plans before you reach retirement age. Taking early withdrawals may force you to owe income tax on disbursements and an additional 10% penalty to the IRS. Plus, taking early withdrawals will severely diminish the future earnings potential of your retirement plan.

There is the option to cash out your 401(k) via an indirect rollover, which lets you access your funds penalty-free as long as you roll them over in full into a new retirement plan within 60 days. But you can’t know when you’ll get a new job, and if you can’t scrape together the funds by the 60-day time limit, your withdrawal becomes taxable.

For an in-depth explanation of your 401(k) rollover options, check out our guide.

Recommended reading

For an explanation of your rights when it comes to paid time off and layoffs, read our article.

Investopedia explains how to know if you’re eligible for COBRA coverage, the pros and cons and the potential costs.

Each state manages its own unemployment benefits, but the federal government has a good information database (along with links to state resources).

Need more than just unemployment? There are many local, state and federal programs that can help - including support for starting a small business, feeding your family and more. Here’s a list of federal benefits and here’s a list of some additional resources.

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Image: William Ivan