Don’t let a job loss derail your financial future. Consider these steps to help you stay on track to your long-term goals, even when short-term unemployment happens.
Unemployment is often unplanned and stressful—and can lead you to make rash decisions that have a lasting impact on your financial future. Job losses can come with feelings of helplessness. But you can reclaim some control over your life in the time after you’ve lost a job, making prudent decisions in how you manage your personal finances.
Start to Replace Your Income. The first step to take when you lose your job is to apply for unemployment benefits. There’s no shame in claiming unemployment—these programs exist to help you through difficult periods. You can use these benefits to cover some of your basic living expenses and help keep you from withdrawing too much from your savings.
Be Ruthless With Your Budget. While finding alternate sources of income is important, you should also look at your household budget for spending you can reduce or even eliminate. Discretionary spending and “fun” purchases should stop immediately. But even with your essential expenses such as groceries or utilities, you may find ways to trim your cash outflows. For instance, cut back your cable or internet spending and cancel some streaming subscriptions. Also, downgrade your cell phone plan or look closely at your insurance coverage for excessive or unnecessary charges.
Tap Your Emergency Fund. While you may use your “rainy day” fund for different unplanned expenses, a spell of unemployment is exactly the type of financial emergency you’ve been saving for. Most financial planners recommend keeping enough money in your emergency savings to cover 3-6 months of essential expenses. For many people, this is how long it takes to find a new job that will replace your previous income.
Leave Your Retirement Savings Alone. One thing you want to avoid as much as possible is pulling money out of your retirement savings. Tapping a 401(k) or other retirement account for income when unemployed may make it harder to get back on track and can put your retirement savings goals out of reach.
When you lose a job, you might have to move any money you have saved in your former employer’s retirement plan into a personal retirement account. You may be tempted to divert these funds to your checking account, instead of keeping that money earmarked for retirement. Don’t do it! Not only will you lose ground in your plan for retirement, you’ll also pay taxes and a 10% penalty on any 401(k) money that isn’t directly rolled over into an IRA or another employer’s 401(k).