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Jul 10

How to Financially Prepare for a Job Loss

FInancially Prepare for Job Loss

No one likes to think about the possibility of becoming unemployed, but you can never be too safe when it comes to preparing for financial emergencies. Worrying over how you’re going to pay the bills or stay out of debt is never fun. 

Whether or not you think you’ll be facing a period of unemployment in the future, it always pays to be prepared. Especially if you do know you’ll be laid off soon, or if your company is undergoing changes.

Learning how to financially prepare for a job loss means less stress if the time ever comes. Here are a few ways you can safeguard your money against the loss of income. 

The Most Obvious: Have an Emergency Fund 

We’re going to cover the most obvious solution first: having an emergency fund ready to go. An unforeseen job loss certainly qualifies as an emergency, and that’s why we recommend having 3 t0 6 months’ worth of living expenses saved. 

Depending on the industry you’re in or what type of work you do, you may need more or less. For example, freelancers and entrepreneurs who have a volatile income — rather than a steady paycheck — may want to put away more in a rainy day fund. But don’t get tripped up over how much you “should have.” It’s more important to simply start!

If you’re a Money-Guy Show listener, we’re fairly sure you’re already on the ball with this, but we couldn’t not mention it.

Have More Than One Source of Income

As the saying goes, don’t put all your eggs in one basket. Diversifying isn’t exclusive to investing. It applies to your income, too. If your only source of income is from your day job, consider finding new and novel ways to make a little extra on the side.

How can you diversify your income? Are there any small side jobs you can dedicate spare time to? If you’re an expert in your field, consulting may be a good choice (as long as it doesn’t interfere with your day job right now). You could also try freelancing if a hobby of yours is able to be monetized. 

Create a Bare-Bones Budget 

Besides having your emergency fund ready, you should also create a budget that contains only the bare necessities. In the event of a job loss, it’s worth going into ultra-frugal mode (if you can).

That means any luxuries you treat yourself are gone. Cable, manicures/pedicures, hair appointments, dining out, a gym membership — they all qualify. Go through your current expenses and evaluate them one-by-one. Ask yourself if they’re essential to your survival. If they’re not, don’t include them in your bare-bones budget. 

The purpose of creating a bare-bones budget before a job loss is to know exactly what your monthly expenses would be in a dire financial situation. If you want to earn money on the side to cover your expenses, it helps to have a number to aim for.

If you’re married and your spouse also earns an income, hopefully their salary will be enough to cover your bare expenses. Speaking of which… 

Practice Living Off of One Income

If you’re currently living off of two incomes, and think you may be facing a job loss soon, it’s worth practicing living off of one income. Get that bare-bones budget prepared, and then make it a point to see how difficult or easy it is to live according to it.

It’s normal to have adjusted to a certain lifestyle after earning a decent amount, but when your income decreases, you need to be able to adjust back.

Is living off of one income too hard? Try living off of 50% of your combined income. The point is to get used to living on less. Pretending like you’ve already lost that income can help prepare you for the transition. 

Evaluate Your Insurance

Your paycheck isn’t the only thing you lose with your job. You lose any insurance offered through your employer, too. 

Don’t skip considering this issue this even if you’re enrolled through your spouse’s insurance. You should both be equally prepared for a job loss, regardless of who’s in a more stable situation.

It’s important to know the options available to you through a marketplace plan, or through your spouse (if you’re married). Going without insurance, even just for a few months, isn’t a wise idea. Plus, you’ll have to pay fees for each month you’re uninsured come tax time. 

Know What Happens to Your 401(k) 

Have you been contributing regularly to your employer-sponsored retirement plan? It’s imperative you know what will happen to it if you’re laid off. You should ask your plan manager what your employer’s guidelines are so you’re crystal clear on the matter. 

Typically, you can either leave it be and let your former employer keep the account open for you; roll it over into a new 401(k) at your next job; roll it over into an IRA; or, cash it out (which you really shouldn’t do).

It Pays to Be Prepared

No one knows what the future holds, and everyone is replaceable. Whether you’re a contract worker, a full or part time employee, or a business owner, your income isn’t guaranteed. Fortifying your finances to withstand a job loss is crucial to avoid the stress and emotional drains that come with being unemployed.

Having your money in order actually gives you a semblance of freedom, too. You won’t feel like you have to take the first job that comes your way just for the paycheck. The lack of pressure allows you to take your time to search for an opportunity that excites you. This ensures you’ll end up happy in your next position, rather than resentful.