HARTFORD — Unemployment rates have skyrocketed to 8.1 percent in February, according to the Bureau of Labor Statistics.Many people either know someone who’s been laid off or were laid off themselves. When you lose your job, you may have to put yourself on a financial diet. People tend to eat less when they want to lose weight, and staying afloat financially is no different and really quite simple: spend less.
It’s not an easy process, but it can be done with a little self-discipline, some creativity and a whole lot of planning.
Plan for a six-month period of unemployment. It’s hard to know how long you’ll be unemployed, but according to the Bureau of Labor Statistics, the average duration of unemployment in February was 19.9 weeks. You may find a new job within a few weeks, or it may take you months. Either way, it’s best to plan for a worst-case scenario. Take this realistic scenario for example:
Week One: You send out ten resumes, and wait for the phone to ring.
Week Two: You send out ten more resumes, and wait some more.
Week Three: You send out five resumes for jobs you really want and five for jobs that you really don’t want. The phone rings! But it’s your mother.
Week Four: The phone rings. Then it rings again. You line up two job interviews and send out three more resumes.
Week Five: You have two interviews and send out five more resumes. You’re called for a second interview at one of the jobs.
Week Six: Good news: You’re hired! Bad news: You can’t start for two more weeks.
As you can see, even a successful job search can take a while, even if you’re a great candidate in a good job market. Prepare yourself for the worst by drawing up a financial plan as soon as you lose your job.
Draft a survival budget. A survival budget is a bare-bones version of your regular budget. This will illustrate what income you need to literally survive on a monthly basis. Start by listing your needed expenses and your post-employment income – i.e. unemployment insurance. Only you can differentiate your wants from your needs.
Expect that life is going to change. When you lose your job, you probably won’t be able to live the same way you did when you had a job. If you’re unemployed only for a few weeks, then your life might not change drastically. Maybe you’ll only need to spend a little less on groceries, go out to eat once every two weeks, and barely dip into your savings account. But if you’re unemployed for months, you need to take a more drastic approach to survive. Take this into consideration when drafting a survival budget.
Map out your priorities – how desperate are you? Desperation can trick you. Things you once said you’d never do seem more and more appealing the more time you spend at home alone with your dog – hardly an exciting lifestyle. When you started your job search, maybe you said, “I’ll do anything to survive, but I won’t sell my Jeep!” Four months later, you’re saying, “Okay, maybe the Jeep has to go, but I’ll never disconnect my cable.”
What are the things you will and won’t do or sell to survive financially? At this point, do yourself a favor and map them out as well.
Find ways to increase your income. There are many ways to increase your income while you look for a new job. First, open an unemployment claim immediately after you leave your old office. You can also check the “Help Wanted” ads in your local paper and the “Gigs” section of Craigslist.org. Both are great sources of finding jobs for quick cash while look for your full-time job.
Negotiate with your creditors. If you’re having trouble paying all your bills, seriously consider negotiating with your creditors. If you have good credit, you may find it relatively easy to reduce the interest rates on your credit cards, skip a payment or two on your car loan, or reduce your monthly payments temporarily. To do this, you’ll have to put aside your pride and admit that you’re having financial difficulties.
Withdraw money from your retirement account. Withdrawing money from your tax-deferred retirement account is an option you should consider only as a last resort to avoid bankruptcy. In general, any money you withdraw from a tax-deferred retirement account will be taxed as ordinary income, and you may have to pay a 10 percent penalty if you’re under age 59½. Some Roth plans allow you to withdraw money tax-free and penalty-free after being vested for five years, and some 401(k) plans allow you to borrow against the balance. Every plan is different, so consult a professional for your options.
Borrow from the cash value of your life insurance policy. If you have a life insurance policy with cash value, such as Whole Life or Universal Life, consider borrowing from the cash balance. You’ll have to repay the money just like a 401(k) loan, but not right away.
Follow the plan. Once you’ve devised a realistic financial plan, stick to it. Like any diet, you’ll be tempted to cheat by spending a little more than you should. That’s okay as long as you cover the loss somewhere else. Remember, your plan is designed to be flexible so that you don’t feel burdened by something that seems unworkable.
Diets don’t last forever. Keep in mind that even though you’re on a financial diet, no diet lasts forever. At some point, you’ll find another job and the crisis will pass. Therefore, you want to be especially careful that the decisions you make now aren’t shortsighted. Don’t sell your car for dirt cheap when you’ll need to buy another one for your next job. Once you get back on your feet, replenish any emergency funds or retirement funds you tapped into. Otherwise, you won’t be prepared for the next crisis.
John D. Coury is a financial advisor with Waddell & Reed, Inc. in Hartford, CT. Waddell & Reed, Inc. Member SIPC.