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Plan Well, Retire Well

Saving and investing your money

Preparing for a Layoff

Between my husband and I, we have received three "terminal contracts" or "pink slips" over the last several years, giving us notice that we would be losing our jobs. We were both fortunate that we were able to transfer to different positions with our employers and remain employed. But nonetheless, we went through the gut wrenching process of reviewing every expense to figure out where we could cut.

University of Illinois Extension learned last month that our state funding would not be released and County Directors were to prepare a plan of what staff would be let go. I know exactly what those individuals will be thinking and feeling. My goal with this post is to share some ideas that people can use to prepare for a layoff.

As I'm writing this, we are just hearing news that Extension's funding may be restored. I sincerely hope that these reports are accurate. But layoffs happen on a regular basis, and you are likely reading this because you are at risk. Perhaps one of these ideas will help you put yourself prepare financially for that possibility.

All financial education programs and financial experts recommend having an emergency fund. There's nothing like the threat of a layoff to make you stop and think, How long would my cash-on-hand last? Do a quick, back-of-the-envelope calculation: How much do you spend in a month? And how much do you have in your checking and savings accounts? Perhaps you also have savings bonds, CDs at the bank, or a money market account. How many months would these funds support you?

The average job search lasts about six months. Could you make it that long without income? No? Your main focus should be to build up your emergency fund while you do have income. Make a plan for how to reduce expenses, and to increase income. It might keep you from losing your apartment or house.

Look at every expense and ask yourself, honestly, if it's a necessity. And even if it is a necessity, how could you reduce it? I really like watching Animal Planet and National Geographic on television, but that might be one of the first things to go if I get laid off. (Note: I have had the service more than a year and don't have any contractual obligations to keep it.) It may help to list each expense on a separate card or piece of paper and then prioritize them.

Be creative in looking for expenses you can cut. Are there purchases that you can "unwind"? For example, if you've ordered items that have not arrived or that you haven't used, think about returning them or cancelling the order. You may be able to cancel magazine subscriptions and get a refund.

Look for ways to increase your income to build up that emergency fund. Could you generate some cash by having a yard sale or selling clothing at a resale shop? Have you loaned money to others who have not yet paid you back?

Another source of spending money during a long layoff could be credit. Is your credit card at the limit, or do you have available credit that you could use as a last resort? While you're still earning an income, make paying down your credit card balance a top priority. You could need that credit line for groceries and kids' shoes in a few months.

This is probably the only time you'll ever hear me say, Stop contributing to a retirement plan. But until you get laid off, you could stop contributing to your retirement plan in order to increase your take-home pay and use the money to build up your emergency fund. If you're married or have a significant other, the same goes for them. (Note that your income taxes will also go up, unless you were contributing to a Roth.) Just make sure that the extra take-home pay goes straight into a savings account - no splurging on a special dinner or frittering it away on a depressed buying spree.

Stopping contributions to a retirement plan is usually a better idea than taking out money that you've already contributed. That should truly be a last resort. If you use money from a 401(k) plan, IRA, or other retirement plan, you will have to pay income tax on all of the money. You will also probably owe a 10% penalty. If you had $5000 in the account, you might only end up with $2950. That is a very expensive way to get money.

If you do lose your job, make sure to file for unemployement compensation right away. Your working spouse could fill out a new W-4 form to have less tax taken out of their paycheck based on your lower income. But be aware that you generally must have paid at least 90% of what you end up owing in taxes (through payroll withholding or estimated tax payments), or 100% of the amount you owed in the previous year, to avoid IRS penalties.

Worrying that you may lose your job is a terribly traumatic thing. Actually getting the notice is a horrible experience. But knowing that your financial house is in order and that you have a plan to deal with the lost income can take some of the panic out of the situation. I hope you never have to use the ideas in this post. But if you're at risk, please take action NOW. From time to time, my husband looks at me and says, What will happen if I lose my job? I think it takes some of the pressure off when I can honestly say to him, We'll be OK.

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