Losing a job is an unfortunate life event that you can’t necessarily predict — but it is one you can be financially prepare for. If you’re concerned about the possibility of losing your job, there are proactive steps you can take to help ease your mind and soften the financial impact.
We are here to help you navigate life’s many transitions and periods of uncertainty. Here’s how to be financially prepared for a job loss:
1. Increase your cash reserve
Perhaps the most effective way to prepare for job loss is to increase your cash reserve, which is a pool of money set aside to pay for expenses when the unexpected happens. In the event of a job loss, this cash reserve can be used in place of your paycheck to fund your living expenses. As such, it’s generally wise to have three to six months’ worth of expenses in your cash reserve.
If you are especially worried about your future job prospects or if you work in an industry that’s experiencing upheaval, consider adding to your emergency fund to cover a longer time horizon. It can give you a sense of security to know that you have a bigger financial cushion to weather the uncertainty. Further, if you are a high-income earner or have a highly specialized job, you also may want more money set aside in your reserves, as it may take longer to find a comparable employment opportunity in the event of job loss. The same goes for those families who rely on one income source.
2. Pay down high-interest debt
When used wisely, debt can be an effective tool to building wealth. However, having too much high-interest debt is also a financial risk. When there’s uncertainty around your future income, it’s worth considering a more aggressive approach to tackling high-interest debt, such as a credit card balance or personal loan. Debt payments, after all, are a fixed cost in your budget that must be repaid, even if an unforeseen event, like job loss, arises.
3. Look for ways to reduce expenses
When proactively preparing for job loss, it’s smart to review your expenses, create a budget and identify how you can reduce costs. Being aware of your expenses can effectively position you to make changes in the event of job loss, so decide what’s necessary and what’s discretionary in your budget. Now is the time to consider how you may want to limit spending on discretionary services and subscriptions.
4. Understand your company’s severance policy
If there are indications of potential layoffs or restructuring at your place of employment, research your company’s policy and employment contract to find out whether severance pay is offered upon the termination of employment. Having an idea of what a severance package may look like can be helpful as you seek to understand your time horizon to secure a new job. However, while this information can help inform your financial planning, it’s important to remember that severance pay is not guaranteed income as it’s not mandated by law. Further, a company can always change their policies and if an organization is in financial straits, they may not be able to fulfill their severance obligations.
5. Make the most of your employee benefits now
If you are concerned about the possibility of job loss in the near future, it may be wise to consider how you can make the most of your employee benefits now. For example, you may want to schedule doctor’s appointments and secure medical prescriptions earlier than normal to make use of your health insurance. Or perhaps your employer does not pay out unused vacation days upon an employee’s departure. If so, consider if it makes sense to use your vacation days soon so you don’t potentially miss out on this benefit.
6. Review your life and disability insurance coverage
Many Americans satisfy their life and disability income insurance needs through their employer-sponsored options. While these policies can be less expensive because they are subsidized by the employer, it’s common to lose coverage upon your departure from your workplace. As such, consider purchasing separate disability and life coverage outside of your workplace plan. It can supplement your employer policy and help you maintain a level of protection in the event you become unemployed.
7. Proactively begin your job search
It’s conventional wisdom that it’s easier to find a job when you still have a job. If you believe job loss may be imminent, starting your search when you’re still employed may give you an advantage in the market. Update your resume, line up references, reach out to your professional networks, apply for new positions and begin interviewing with other organizations. You may even find a better job opportunity through these efforts.
Questions? Contact Michael Matus, your local Ameriprise Financial Advisor.
