Are You Financially Prepared for a Layoff?
By: Jonathan D. Pond By: Source: AARP.org
If you are one of the many people who fear losing your job
because of the current recession or for some other reason,
start getting your finances in order now.
Preparing in advance will reduce the disruption to your career
and personal finances that are almost inevitable if you become
unemployed. And even if you keep your job, you’ll be in a
much stronger position financially and mentally because you
took these steps. Incidentally, many of these suggestions are
a good idea under any circumstance, not just the threat of
imminent unemployment.
Prepare a survival budget. Set up a budget that assumes you will be unemployed for a
period of six months. First estimate your income during unemployment, including unemployment
compensation benefits and severance payments. Look carefully at your past expenses and
classify them according to importance: expenses that must be paid (such as the mortgage or
the rent); necessities that could be reduced somewhat in the event of dire financial straits
(home maintenance); and discretionary expenses, such as clothing, vacations, and meals at
restaurants.
If your expected income during unemployment won’t meet your expenses—and it probably won’
t—plan how to close the gap. Any solution probably involves a combination of reducing your
living expenses and finding other sources of income.
Reduce current spending in order to increase savings. The two best things that you can do to
prepare for financial adversity go hand in hand: Reduce your current level of spending and
increase your savings.
Setting aside some savings now may help you meet your living expenses later if you become
unemployed. A financial cushion is the best way to soften the trauma of unemployment. It is bad
enough that you may have to go through the job-hunting process. But it would be doubly
unfortunate to have to worry about making ends meet. So take action now to increase your
savings or begin a savings program. Putting one percent of your income (or whatever you can
afford to set aside) into a readily accessible savings or money-market account is a good start.
Manage your debt. If you have outstanding debts, such as auto loans and credit cards,
should you reduce them in anticipation of unemployment or concentrate on building up your
savings?
In general, if you are concerned about losing your job, you should be careful not to fall behind
in debt payments, but you’re better off putting extra money in savings rather than further
reducing your debt.
Here’s why: If you do lose your job, you may have to dip into savings to meet living expenses. If
you use your savings to reduce your debts, then you don’t have the financial cushion. Paying
down high-interest debt is a good idea under normal economic circumstances. Your financial
uncertainty, however, requires that you establish a generous emergency fund rather than
reduce your debts.
Adjust your tax withholding. If you are quite certain that you are going to be laid off, you
might want to arrange to have less income tax withheld from your paycheck. If you increase the
number of exemptions, your take-home pay will be larger. This will provide extra income to use
when you are unemployed.
Don’t worry too much about the tax implications. Even though you decreased your tax
withholdings while you were still employed, the taxes owed will probably balance out by the end
of the year.
Defer large expenditures. Now is not the time to make any large purchases, such as a new
car, flat-screen TV, or home improvements. Wait until you are confident that your job is not in
jeopardy. Even then, you should be very careful about making major financial commitments
when the economy is on the rocks. It’s tempting, because car dealers and home improvement
contractors tend to lower their prices when business is slow. People who are blessed with
abundant cash reserves and certain future-income prospects may take advantage of these
offers, but you would be better off deferring all major purchases until your job uncertainty is
resolved.
Plan for continuing insurance coverage. One of the worst things people can do during a
period of financial adversity is to let their insurance coverage lapse. We’ve all heard
unfortunate stories of people who thought they couldn’t afford to continue their health-
insurance coverage, only to find their finances wiped out by an uninsured illness or accident.
Be sure to include a provision in your budget for paying insurance premiums.
Also, decide ahead of time how you are going to replace your employer-provided health and life
insurance when it expires. Your company is probably required to allow you to continue your
group health coverage for a period of time after termination, as long as you pay the premiums.
Look into it, and make it a priority to keep your medical coverage.
Review your investments. If you are expecting to lose your job, you should review your
investments.
First, determine how much of your invested funds can be readily converted into cash to meet
living expenses if the need arises. At best, you won’t have to liquidate any retirement-account
investments (IRAs, 401(k)s, 403(b)s, or the like), since doing so is likely to result in hefty taxes,
and, if you’re under age 59½, penalties.
Second, decide if you want to sell some low-yield investments, which pay little or no dividends,
such as many stocks. Reinvest the money into interest-earning securities like certificates of
deposit (CDs) and money-market mutual funds, which will provide you with higher current
income to help meet expenses when you are without a paycheck.
For example, it may not make sense to sell any stocks or stock mutual funds that will result in
big capital gains taxes in order to buy interest-earning investments like bond mutual funds and
U.S. Treasury securities, since the taxes you’ll have to pay will reduce the amount of money
available for reinvestment.
Have a plan for your 401(k). If you have a retirement-savings plan with your employer,
something like a 401(k), you should probably roll the money over to an IRA after you leave.
One advantage of any IRA account is that once a year, you can borrow from your IRA with no
taxes or penalty as long as you replace the money within 60 days of receiving it. This could help
tide you over, but taking a loan from an IRA should only be done if you’re confident you can pay
it back within the 60-day period.
http://www.aarp.org/money/personal/articles/financially_survive_layoff.html
By: Jonathan D. Pond By: Source: AARP.org
If you are one of the many people who fear losing your job
because of the current recession or for some other reason,
start getting your finances in order now.
Preparing in advance will reduce the disruption to your career
and personal finances that are almost inevitable if you become
unemployed. And even if you keep your job, you’ll be in a
much stronger position financially and mentally because you
took these steps. Incidentally, many of these suggestions are
a good idea under any circumstance, not just the threat of
imminent unemployment.
Prepare a survival budget. Set up a budget that assumes you will be unemployed for a
period of six months. First estimate your income during unemployment, including unemployment
compensation benefits and severance payments. Look carefully at your past expenses and
classify them according to importance: expenses that must be paid (such as the mortgage or
the rent); necessities that could be reduced somewhat in the event of dire financial straits
(home maintenance); and discretionary expenses, such as clothing, vacations, and meals at
restaurants.
If your expected income during unemployment won’t meet your expenses—and it probably won’
t—plan how to close the gap. Any solution probably involves a combination of reducing your
living expenses and finding other sources of income.
Reduce current spending in order to increase savings. The two best things that you can do to
prepare for financial adversity go hand in hand: Reduce your current level of spending and
increase your savings.
Setting aside some savings now may help you meet your living expenses later if you become
unemployed. A financial cushion is the best way to soften the trauma of unemployment. It is bad
enough that you may have to go through the job-hunting process. But it would be doubly
unfortunate to have to worry about making ends meet. So take action now to increase your
savings or begin a savings program. Putting one percent of your income (or whatever you can
afford to set aside) into a readily accessible savings or money-market account is a good start.
Manage your debt. If you have outstanding debts, such as auto loans and credit cards,
should you reduce them in anticipation of unemployment or concentrate on building up your
savings?
In general, if you are concerned about losing your job, you should be careful not to fall behind
in debt payments, but you’re better off putting extra money in savings rather than further
reducing your debt.
Here’s why: If you do lose your job, you may have to dip into savings to meet living expenses. If
you use your savings to reduce your debts, then you don’t have the financial cushion. Paying
down high-interest debt is a good idea under normal economic circumstances. Your financial
uncertainty, however, requires that you establish a generous emergency fund rather than
reduce your debts.
Adjust your tax withholding. If you are quite certain that you are going to be laid off, you
might want to arrange to have less income tax withheld from your paycheck. If you increase the
number of exemptions, your take-home pay will be larger. This will provide extra income to use
when you are unemployed.
Don’t worry too much about the tax implications. Even though you decreased your tax
withholdings while you were still employed, the taxes owed will probably balance out by the end
of the year.
Defer large expenditures. Now is not the time to make any large purchases, such as a new
car, flat-screen TV, or home improvements. Wait until you are confident that your job is not in
jeopardy. Even then, you should be very careful about making major financial commitments
when the economy is on the rocks. It’s tempting, because car dealers and home improvement
contractors tend to lower their prices when business is slow. People who are blessed with
abundant cash reserves and certain future-income prospects may take advantage of these
offers, but you would be better off deferring all major purchases until your job uncertainty is
resolved.
Plan for continuing insurance coverage. One of the worst things people can do during a
period of financial adversity is to let their insurance coverage lapse. We’ve all heard
unfortunate stories of people who thought they couldn’t afford to continue their health-
insurance coverage, only to find their finances wiped out by an uninsured illness or accident.
Be sure to include a provision in your budget for paying insurance premiums.
Also, decide ahead of time how you are going to replace your employer-provided health and life
insurance when it expires. Your company is probably required to allow you to continue your
group health coverage for a period of time after termination, as long as you pay the premiums.
Look into it, and make it a priority to keep your medical coverage.
Review your investments. If you are expecting to lose your job, you should review your
investments.
First, determine how much of your invested funds can be readily converted into cash to meet
living expenses if the need arises. At best, you won’t have to liquidate any retirement-account
investments (IRAs, 401(k)s, 403(b)s, or the like), since doing so is likely to result in hefty taxes,
and, if you’re under age 59½, penalties.
Second, decide if you want to sell some low-yield investments, which pay little or no dividends,
such as many stocks. Reinvest the money into interest-earning securities like certificates of
deposit (CDs) and money-market mutual funds, which will provide you with higher current
income to help meet expenses when you are without a paycheck.
For example, it may not make sense to sell any stocks or stock mutual funds that will result in
big capital gains taxes in order to buy interest-earning investments like bond mutual funds and
U.S. Treasury securities, since the taxes you’ll have to pay will reduce the amount of money
available for reinvestment.
Have a plan for your 401(k). If you have a retirement-savings plan with your employer,
something like a 401(k), you should probably roll the money over to an IRA after you leave.
One advantage of any IRA account is that once a year, you can borrow from your IRA with no
taxes or penalty as long as you replace the money within 60 days of receiving it. This could help
tide you over, but taking a loan from an IRA should only be done if you’re confident you can pay
it back within the 60-day period.
http://www.aarp.org/money/personal/articles/financially_survive_layoff.html
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