Weekly unemployment claims are declining, but the number of new claims still topped 400,000 last week and many Americans remain concerned about losing their jobs. If you think that your job may be at risk, you can do more than worry. You can prepare your finances to give yourself more confidence and less stress. Here are steps to take now to prepare for a potential job loss.
1. Get organized
Setting up a proper budget and living within your means are consistent themes when it comes to financial advice. If you haven’t set up a budget, now is the time to get serious. One of my favorite tools is Mint.com. It is a free website that helps you track your spending. Once you know where your money is going you can make more informed decisions, cutting those items that you don’t really need.
2. Build a cash reserve
A cash reserve is always a good idea, but when you think your job is at risk having a little extra cash on hand can give you a lot of peace of mind. The rule of thumb for a cash reserve is 3 to 6 months-worth of spending. If your job may be at risk, I would use 6 months as a target. Cash gives you time to find the next job and is your insurance policy against financial shocks.
3. Review your mortgage
We recently encouraged our clients to review the mortgage due to the decline in rates. If it makes financial sense, consider refinancing your mortgage to get the monthly payment down. This can be a good idea anyway but reducing your monthly outflow can help you build your cash reserve. Consider a 30-year mortgage rather than the 15 year to give you some potential breathing room in the budget. If you have been making extra payments, consider stopping this practice until this storm is passed. Don’t get me wrong, paying off the mortgage is a good idea, but not while you are in the midst of a layoff. Remember that refinancing while you are out of work can be difficult or impossible, and you will need to be open with your situation, so it is best to explore your options while the layoffs are still in the ‘rumor’ stage.
4. Consider opening a Home Equity Line of Credit
If your mortgage is already in good shape, consider opening a Home Equity Line of Credit (HELOC). Most banks will allow you to open a HELOC at little to no cost, and you don’t have to borrow money unless you need it. Again, once a layoff happens this option may be closed to you, so it is important to set up a HELOC before the crisis hits. Don’t get me wrong, I hate debt, but having the flexibility to get short term cash while you are out of work can buy you some more time to get that next job.
5. Take the overtime or find a part time job
Having a little bit of income can make a big difference, so consider accepting any overtime at your current job. If there is none available, consider picking up a part time job now. If your spouse is not working perhaps it is time to consider that option. The idea here is to take those steps before there is a crisis. The extra money can be used to build your cash reserve now, and if the layoff happens, you will already have another income stream to help fill the gap.
6. Review your health benefits
Providing for health care once you have been laid-off can be one of the most difficult and expensive challenges. If your employer has 20 or more employees, the company will be required by federal law to offer you the option to pay for an extension of your existing coverage. This is known as COBRA. Unfortunately, COBRA can be very expensive. If your spouse also has health coverage, review the enrollment provisions. Most large companies have special enrollment, which allows the immediate addition of a family member without having to wait for the annual enrollment period. However, this is not a given. If open enrollment is coming up it may be time to shift the kids to your spouse’s plan while you can.
7. Review your retirement benefits
Your 401K, 403b, and IRA are best used for your retirement, not for layoffs. Having said that, sometimes you have no other choice than to tap into these funds and recent changes to the tax code have made it easier to access these funds. For example, the CARES Act allows eligible participants to take an early distribution of up to $100,000 during 2020 without paying the 10% penalty that normally applies to distributions before age of 59.5. There are also provisions within the tax code that allow you to pull money out of your 401k to pay for COBRA health insurance coverage in the case of layoff (with important limitations). How you pull out the funds matters, so consult with an advisor before you move your retirement accounts.
8. Don’t stress
Often, a layoff can lead to an even better opportunity. Be open to exploring new opportunities. Yes, this can be a stressful time, but it doesn’t have to be a negative. By taking the steps above, you will have the time to explore new jobs that will put you in an even better place.
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