The fear of financial instability from a layoff is real, especially with recent news of federal job cuts and growing economic concerns. It’s natural to feel anxious. Losing a job can be a challenging and stressful experience, but being prepared financially can help alleviate some of the worries that come with a layoff.
Because layoffs can happen unexpectedly, it’s a good idea to get your finances in order — especially if you have received a warning, or suspect that lay offs may be coming.
We’ll guide you through effective strategies to help you prepare your finances for a layoff and some proactive steps you can take to navigate through this difficult period with greater confidence and peace of mind.
What does it mean to be laid off?
Being laid off means your job was eliminated due to company cutbacks. This often happens when the economy weakens, a business restructures, or finances become tight. While it’s understandably upsetting, layoffs are usually driven by economic realities, not personal shortcomings. It’s a business decision that, unfortunately, affects many people, but it’s something you can proactively prepare for.
What’s the difference between being laid off, furloughed and fired?
Layoffs, furloughs, and firings, all result in a loss of work, but they differ significantly in their causes and effects.
A layoff occurs when a company needs to reduce its workforce. It’s usually not about your performance, but rather the company’s financial situation. If you’re laid off you may be offered a severance package and will most likely be eligible for unemployment.
A furlough is a temporary pause in work, where you’re still an employee, but you don’t get paid for a while. The company plans to bring you back later. You may be eligible for unemployment while you’re furloughed (check with your state’s law). Whether you retain benefits during a furlough varies depending on the employer’s policies, so contact your HR department for more information.
Being fired means your employment is ended because of your actions or performance. You may not have met the company’s standards or broke the rules. Your eligibility for severance, benefits, and unemployment can vary significantly depending on the reasons for the termination and the specific laws in your state.
Assess your financial situation
The first step in preparing for a layoff is to assess your current financial situation. Take a close look at your income, expenses, debts, and savings. Understanding your financial standing will provide you with a clear picture of where you stand and what adjustments need to be made.
Create a budget
Creating a budget is essential during a layoff. It helps you track your expenses and ensure that your money is allocated wisely. Start by listing all your essential expenses, such as rent, utilities, and groceries. Then prioritize your discretionary expenses and find areas where you can make cuts.
Cut spending immediately
To better prepare for a layoff, it’s crucial to identify and reduce unnecessary expenses. Consider cutting back on eating out, entertainment subscriptions, and non-essential shopping. Look for cost-saving measures, such as negotiating bills, finding cheaper alternatives, or downsizing where possible.
Spend as if you’ve already lost your job. Begin padding your emergency fund immediately by cutting most of the luxuries that you indulge in because 66 million Americans don’t have one. This is also a good time to review your finances. Take a look at your spending and think about where you can make cuts.
Your aim should be to get as many months saved as you can. Ideally, you should be able to survive for at least six months without going into debt. But even if you can’t make six months, anything is welcome.
Build an emergency fund
Having an emergency fund is a financial safety net during uncertain times. Aim to save at least three to six months’ worth of living expenses. But even if you can’t save that much, anything is welcome. Start by setting aside a portion of your income each month. Automating your savings can make it easier to build your emergency fund consistently.
Reduce your savings contributions
Going into debt after a job loss is a real possibility, so you need to prioritize immediate needs over long-term savings. While it may seem counterproductive, stop contributing your salary to retirement funds, pension plans and other employee funds. Take what you would have contributed and put it in your emergency fund. This will help you make sure you don’t have to take out any credit card debt in the immediate future.
Prioritize debt repayment
If you have outstanding debts, it’s important to prioritize repayment during a layoff because it stops those debts from growing bigger and causing more stress, and protects your credit score when you need it most. Speak with your creditors to explore repayment options, negotiate interest rates, or defer payments temporarily. Many credit card companies have hardship programs, so it’s worth calling their customer service line and asking about those. Focus on paying off high-interest debts first and consider seeking professional advice if needed.
Consider government assistance programs
During a layoff, government assistance programs can provide temporary financial support. Research and understand the available programs, such as unemployment benefits or job placement services, and determine if you are eligible to apply.
Review your insurance coverage
During a layoff, it’s important to review your insurance coverage, including health, life, and disability insurance. Evaluate your coverage and make any necessary adjustments to ensure you and your family are adequately protected during this period of transition.
Figure out your health insurance
The worst case scenario is you lose your job and fall seriously ill soon after. This can cripple your financial health and leave you with huge medical bills. Hoping you’ll find a new job and insurance before something major happens is a huge financial risk.
Instead, take action on your health insurance. Your old job’s insurance might last for a short time, giving you a chance to explore options. Check if you can continue your old plan with COBRA, but be aware it’s usually costly.
See if your spouse’s insurance covers you, or look into the Health Insurance Marketplace (healthcare.gov). This website offers various health plans, and you may qualify for financial help based on your income. Losing your job allows you to enroll outside the usual sign-up period.
Explore alternative income sources
While searching for a new job, consider exploring alternative income sources. This could include freelancing, gig work, consulting, or taking up temporary work. These additional income streams can help bridge the financial gap and provide some stability during a layoff.
Tap credit…but do it now
If you have assets like a home, you can borrow against them to avoid relying on high-interest credit cards during a layoff. However, it’s difficult to secure loans or lines of credit when you’re already unemployed; lenders prefer applicants with stable income.
So, it’s a good idea to access available credit before you lose your job. Lenders typically assess your employment status at the time of application. This can provide a financial cushion during unemployment.
Consider this carefully. Only you know how quickly you can find new employment. Remember to borrow responsibly and have a plan for repayment so you don’t lose your assets.
Start developing an income stream now
The worst mistake you can make is to wait until the layoff happens before you act. Review your finances and work out how much money you’re going to need to survive. Begin replacing that income stream immediately.
The first step is to start searching for another job. Again, it’s generally considered easier to find another job if you already have a job. Use that little time you have to secure employment. If you can find a job during this time, the panic is over and you don’t need to worry about getting into debt.
However, if you do have to survive for a while you should consider picking up some part-time work. You might become a driver for Uber, or you may rent out a spare room in your house. You could even start a part-time freelancing business. All you need is money, so get creative.
Other tips
Start looking for other job opportunities now
Don’t wait until a layoff occurs, start your job search now. Prepare by getting your resume, portfolio and contact list updated. Documenting your professional achievements will strengthen your job search, so begin by making a detailed record of your responsibilities, highlighting specific successes like exceeding sales targets, breaking records, and receiving awards. Also, gather projects suitable for your portfolio that showcase your skills and expertise. Finally, compile a list of professional contacts, including names and up-to-date contact information. This will help you create a strong resume and portfolio, and make it easier to network.
If you can time it right, you could start a new, potentially better-paying job right after getting laid off from your current position.
Save important documents
Gather important documents like your W-2, pay stubs and insurance information now while you still have access to your HR files. You’ll need them for unemployment benefits and if you have to switch health insurance.
Schedule medical appointments as needed
Take full advantage of your current health insurance while you still have it. Schedule any necessary doctor visits and refill prescriptions before your coverage potentially changes. While severance might include extended insurance, addressing your healthcare needs now ensures you’re covered.
Seek professional financial advice
Navigating a layoff can be overwhelming, and seeking professional financial advice can offer valuable guidance. Consider consulting with a financial advisor who can help you develop a comprehensive plan tailored to your specific situation.
Tap into your support system
A layoff can be an isolating experience, but you don’t have to face it alone. Now is the time to lean on your support system. This includes family, friends, former colleagues, and professional networks. Share your situation with trusted individuals; they may offer invaluable emotional support, practical advice, or even leads on potential job opportunities. Remember that seeking support is a sign of strength, not weakness.
Maintain a positive mindset
Maintaining a positive mindset is crucial during a layoff. While it’s normal to feel discouraged or stressed, try to focus on the opportunities that lie ahead. Stay optimistic, take care of your physical and mental well-being, and leverage this time for personal and professional growth.
These are worrying times and you might be scared about the road ahead. There’s nothing wrong with that and it’s perfectly normal. But don’t make the mistake of burying your head in the sand. Take positive action and you’ll find yourself well-equipped to handle the turmoil ahead.
FAQs
It is generally recommended to save at least three to six months’ worth of living expenses in your emergency fund.
It’s important to review your health, life, and disability insurance coverage during a layoff to ensure adequate protection.
Networking can help you connect with potential job opportunities and increase your chances of finding employment.
Prioritizing debt repayment can help alleviate financial stress during a layoff. Focus on high-interest debts first and explore repayment options.
Seeking professional financial advice can provide valuable guidance tailored to your specific situation and help you develop a comprehensive plan.
Accessing retirement savings during a layoff should be a last-resort. When taking money out of 401(k) or IRA accounts you’ll be charged penalties and taxes. Not to mention it puts your long-term financial security at risk. If a 401(k) loan is available, consider that before a full withdrawal. Always consult a financial advisor to weigh your options.
Yes, you can often negotiate your severance package, but how much you can change depends on several things like your job level, how long you worked there, and the company’s policies. You can try to negotiate for more severance pay, continued benefits like health insurance, help finding a new job (outplacement services), or changes to non-compete agreements. Approach the negotiation professionally, research what’s typical in your industry, and keep records of all conversations. If you’re unsure about your rights, consider talking to an employment lawyer. Be ready to compromise, and don’t sign anything until you fully understand the terms.
To collect unemployment benefits, first check your state’s eligibility requirements online. Gather necessary documents like ID, employment history, and banking information. Apply online as soon as possible, and be prepared for potential interviews.
Benefits vary by state, so always refer to your state’s official website for accurate information.
Final thoughts
Preparing your finances for a layoff is a proactive approach to mitigate the financial impact of losing a job. By assessing your financial situation, creating a budget, reducing expenses, building an emergency fund, reviewing insurance coverage, exploring alternative income sources, updating your resume and skills, networking, prioritizing debt repayment, considering government assistance programs, seeking professional financial advice, and maintaining a positive mindset, you can navigate through a layoff with greater financial stability and resilience.
