Involuntarily losing your job is not an easy pill to swallow. Aside from the mental toll it may take, it also impacts your finances. It’s important to take a deep breath and take the time to review your financial situation after losing a job. This article will cover four financial moves if you’ve recently become unemployed.
1. Review Your Budget
First and foremost, it will help tremendously to review average monthly expenditures and what spending may be able to be reduced (if necessary). If your emergency funds are lacking, or there is an immediate need to free up extra cash for living expenses, reviewing your budget will be the quickest way to do so.
Focus on prioritizing your expenses. For example, fixed expenses such as rent or your mortgage aren’t going anywhere, and you have to work around those. Necessary expenses take priority over things such as a vacation, new jewelry, or a bike. Variable expenses that aren’t necessary to carry out your everyday life can take a backseat for the time being.
Prioritizing your spending will ultimately help you define a more succinct and successful budget while you’re unemployed and potentially needing to reduce spending.
2. Apply for Unemployment
To be eligible for unemployment benefits in your state, generally, you must meet the following criteria according to the Department of Labor website:
- Are unemployed through no fault of your own. In most states, you have to have separated from your last job due to a lack of available work.
- Meet work and wage requirements. You must meet your state’s requirements for wages earned or work during an established period referred to as a “base period.” (In most states, this is usually the first four out of the last five completed calendar quarters before the time that your claim is filed.)
- Meet any additional state requirements. Find details of your own state’s program.
Every state calculates unemployment benefits differently, so it’s important to review your state specifically. Unemployment is intended to provide relief for some time due to lost wages, and generally, it will replace around half of what you used to earn up to a cap (using average earnings in that state).
It’s common for states to provide unemployment for up to 26 weeks, and the income is taxable. You can select up to 10% withholding directly from the weekly unemployment checks; otherwise, be prepared to owe some additional tax if withholding is not elected.
Unemployment can provide temporary relief; it should be applied for and received if you’re eligible. However, don’t plan on the income being able to sustain or maintain your prior lifestyle. Plan around the timeline and continue to look for work elsewhere should it be necessary for your situation.
To find your state’s unemployment applications and requirements visit the department of labor website here.
3. Review Health Insurance
An often overlooked part of losing your job is the health insurance benefits employers typically provide. It’s also likely the second largest benefit lost (outside of your income) due to losing your job. Often, employers will pay a large percentage of total healthcare premiums. Generous employers may pay it all! It’s important to review health insurance coverage because without it; it can pose a major financial risk should something unexpected and expensive arise. The good news is there are several options to consider regarding health insurance coverage during unemployment, depending on your unique situation.
First, if you’re single and don’t have the option of hopping on a spouse’s health insurance plan, you’ll want to consider COBRA. COBRA (Consolidated Omnibus Budget Reconciliation Act) provides recently unemployed workers and their families the option to maintain their current health insurance coverage. Of course, this comes at the cost of approximately 102% of the total monthly premiums for your current health insurance plan. As I mentioned, many employers pay a portion of the monthly cost of health insurance. If you become unemployed, they’ll no longer pay for any of your health insurance coverage; therefore, you have to pay the entirety of that cost. You may ask why it would make sense to INCREASE your spending when it comes to health insurance during a period of unemployment. Unfortunately, the risk of not having insurance is far greater than the increased cost of paying the monthly premiums to maintain the insurance.
Often, people choose to opt into COBRA if they wish to maintain the simplicity of staying on their current health insurance plan and can afford to pay the higher monthly premiums for the time being. The other option is to review your state’s health insurance plan options.
Every state has a health insurance marketplace you can review after becoming unemployed. The plans are wide-ranging and can vary significantly, so it can be helpful to speak with an advisor or health plan consultant in your state to understand the details and find a plan that fits your situation. Using a state health insurance plan may be cheaper but less comprehensive in its coverage compared to the group health insurance plan provided under your previous employer and COBRA. However, this would be the route if you need to cut costs and maintain basic health insurance coverage.
Finally, if you can hop onto a spouse’s health insurance plan cheaper than opting into COBRA, you may do so after becoming unemployed since it’s a qualifying event.
4. Review Emergency Funds
The last step to take after becoming unemployed is to review your balance sheet and emergency funds. After reviewing and setting a budget, how long can your cash on hand/emergency funds sustain your lifestyle, assuming the new budget? Do you have three months, six months, or one year? Once you have a clear picture of how long your emergency fund can sustain you, it should provide relief and clarity to your situation.
If your emergency fund is lacking and, coupled with unemployment benefits, won’t last as long as you think you’ll need it to, start looking at other sources of cash from your balance sheet. Do you have a taxable brokerage account that investments can be sold or borrowed against if needed? Should the need arise, do you have a home equity line of credit that you can borrow against your home equity? Personal lines of credit and credit cards can also be used if necessary. Generally, you’ll want to avoid borrowing UNLESS the interest rates are in the low single digits. Otherwise, selling investments and generating cash where able will make more sense.
The Bottom Line
Following these four steps shortly after losing your job can help provide mental reprieve and financial stability during the unfortunate time. Schedule a free consultation today if you need further assistance reviewing your options!