Inside: Find out how to ready your finances to prepare for a layoff.
It’s hard to describe. It’s the smell or feeling of tension in the air. You might pick up on it before others but the signs are there.
You may notice your manager not seeking your input, assigning fewer tasks, or you get an unexpectedly negative performance review. There may be other signs such as more frequent board meetings, no bonuses, managers are more stressed, or there are rumors of the company being acquired.
A layoff can catch you flat-footed if you aren’t prepared. If you prepare for the worst, recovering from job loss could amount to little more than an inconvenience.
How to Prepare Your Finances for a Layoff
Suspect you may be losing your job? Then it is time to get your finances in shape.
Go on a spending diet
If you sense a layoff coming you can prepare yourself by cutting back on expenses as if you were already unemployed.
This means you want to cut back to only necessary expenses. These are things such as mortgage or rent, utilities, minimum credit payments, and basic food.
Unnecessary expenses would include spendy nights out with friends, an expensive vacation, and new furniture.
Did you notice I said to make minimum credit card payments? When you need to save money, then efforts to put extra money towards debt should be on a temporary hold.
If you aren’t sure where your money is going, then it is the perfect time to set up a budget or, at the least, track your spending with a service such as Mint. This will help you figure out where your money is going so you can start spending less rather than waiting to cut costs after a job loss.
Bulk up savings
As you cut back on spending, it is important to funnel the extra money into savings. Why? A job search can take weeks, if not months. The goal here is to try and save up 3-6 months of necessary expenses, or as close to it as you can.
Related post: Why You Need an Emergency Fund
Temporarily reduce non-emergency savings
If you know a job loss is imminent, then to help boost your emergency savings you should stop contributing to your children’s 529 plan and cut back on 401(k) contributions, at least at amounts above company match.
Again, this is temporary. As much as I support contributing to retirement and college savings, if it is a choice between racking up debts and becoming homeless because you are putting money into a retirement plan, then it is better to stop those savings while you bolster the emergency fund.
Related posts:
7 Ways to Quickly Build an Emergency Fund
401(k) Vesting Schedules and Why You Should Care
Look for other money-saving measures
Check for insurance discounts
When you are trying to build up your longer-term emergency fund, it helps to find savings wherever you can. Insurance is one place to check.
Call and ask if bundling home/renter’s insurance with auto coverage will give you a lower rate. Often, it will. Also, ask about special discounts you may not know about including security features, driver’s ed, good driver discount, and more.
Renegotiate bills and subscriptions
If you subscribe to a cable service, you could save money by dropping your cable subscription. Even calling to ask about special plans at lower rates can save you a good amount of change.
And let’s not forget your phone. If you are still paying huge monthly fees, you are paying too much. Check into pay-as-you-go plans or other providers for better deals on your cellular service.
Related posts
Check health insurance costs
In the US, losing health insurance when you lose your job is an unfortunate reality. If you have a spouse with a healthcare plan you can join if you lose your job, then that is likely the easiest way to ensure you are covered.
Otherwise, check into COBRA, private healthcare costs, or the cost of enrolling through the Affordable Healthcare Act.
Do you have an HSA (health savings account)? It can be used to pay health insurance premiums if you are collecting unemployment. You can read more on that and the IRS has information in pub. 969.
Become familiar with unemployment benefits
Each state has its own requirements for qualifying for and requesting unemployment benefits as well as the number of weeks you can collect unemployment benefits.
It is likely you can find information for your state online. From posted information, you should be able to determine if you would qualify for benefits, potentially how much you could get, and the maximum number of weeks you are able to claim benefits. Not everyone qualifies, so be aware of where you stand.
Do keep in mind that unemployment income is taxable. States usually won’t withhold taxes from unemployment income, so you need to remember that some of that money will end up going towards taxes.
Use benefits while you have them
Do you have a health, vision, and/or dental insurance plan through work? If so, make use of these benefits while you still have them.
Schedule any needed checkups, get those new glasses, and go see the dentist while costs are still covered by insurance.
If, by any chance, you also have life insurance or other insurance coverage through your employer, check company documents or ask HR if those benefits can go with you and what premiums would be in that scenario.
Check your flex plan
You may know that for dependent care flex benefits, you can only take as much money out of the plan as you have already contributed. The same is not true for healthcare flex plans.
Health FSAs allow a person to use the complete pledged flexible spending plan election at the beginning of the year (with qualifying expenses). BUT, if you are laid off, you may lose access to any unused funds.
Example:
You opted to contribute $2650 to your health FSA. So far this year, you have contributed $220 to the FSA.
In January, you get some dental work done and have to chip in $80, which you use FSA money to pay. Then on February 1, you are laid off.
At this point, you have contributed $220 to the plan and used only $80, leaving $140 unused.
Use of a flexible spending plan is linked to your job. So, to recoup that $140, you would need to have incurred eligible expenses before your termination date and submit the required reimbursement paperwork as of the date specified by your plan (it may be the end of the month or 30 days later, or some other deadline). OR, you may be eligible to continue with the FSA if you are able to continue coverage under COBRA.
It does get a bit complicated, so ask the HR department for information on your FSA plan and the rules should be spelled out in there.
The other option is to use up to your elected amount early in the year. This way, if you leave the company early, you have still used the amount you paid into the FSA plus some. So, schedule those expensive procedures early in the year to heighten the chances you’ll fully reap the benefits of the FSA.
Now, employers dislike this part, but you still get the full benefit of the health FSA even if you leave the company early. This isn’t true of a dependent care FSA which is a claim-as-you-go arrangement.
Some employers dislike this so much, they try and deduct excess health FSA payments from the employee’s last paycheck, which, as far as I can tell and from IRS pub. 969 they shouldn’t do. While it has been too long, I’m pretty certain a former employer of mine pulled a fast one with me on this point many years ago and came up with some mumbo-jumbo explaining the deduction. Grrr
Refinance loans if needed
If you need to refinance a mortgage or other loan, do it while you are employed. Banks won’t refinance loans if you are unemployed and without a steady income for a time, usually two years.
Start job hunting and networking
A well-liked former boss of mine once said it is smart to always keep your resume up-to-date and to test out the job market every once in a while. He almost expected his team members to have an interview or two each year to get a feel for the market and test the waters. He’s not wrong.
It is especially true if you sense layoffs coming shortly or you notice coworkers abandoning ship. Get your resume updated and start job hunting. You may find a great new job without having to go through a layoff. If nothing else, you will have a head start on the job search process.
Layoffs are never fun. With a bit of preparation, you can be ready to weather the storm for a bit and maybe even come out ahead.
Have you been laid off?
Great ideas! I have to admit it is really hard once you reduce the 529 and/or 401K (403B/457 in my case) to increase them again later. We get use to having the extra money and find excuses not to raise it back up to what it was. Just something to keep in mind.
It is hard and it can be easy to slip into old/bad habits! I like to keep a “got a new job” to-do list or set up recurring reminders in Google calendar for that very reason. The reminders may say “Have a job? Set up retirement/college fund contributions again!”