How To Prepare for a Layoff
July 5, 2007
What would you do if your boss pulled you aside today to let you know your position had been eliminated and they were letting you go? Are you financially prepared for this type of bad news? In today’s world of corporate mergers and cost cutting it never hurts to be ready for the unexpected. The Financial Planning Organization suggests these steps to help prepare financially for the loss of a job.
Build your emergency fund
If you don’t have three to six months worth of savings in an interest-bearing account for emergencies, start socking it away. Try to find an account with an automatic deposit feature so you never have to worry about missing a week of savings. Wondering where you’ll find that extra money? Start tracking your spending.
Slash your high-interest debt
While times are good, cut your spending so you can eliminate credit card, auto and home equity debt first. That’s the kind of debt that’s extremely punishing if you’re out of work. The sooner you can learn to manage debt and use it only for reasonable purposes, the sooner you’ll be on your way to a savings and investment cushion that will protect you in good times and bad.
Keep networking
It’s always a good idea to get to know your peers in the city or town where you work. It’s particularly wise to make the time to network while you’re still employed because you might get the lead on your next job well in advance of the time when you may need it. The money you spend on membership in a group or association key to your industry may be the best money you’ve ever spent. Plus, it may be tax-deductible.
Get a line of credit while you’re still working
If you own a home, consider taking out a home equity line of credit and vow never to touch it unless you run into a serious cash flow problem if you lose your job. If you don’t touch it, it won’t cost you anything. Make sure you apply for the line while you’re still working – lenders want to see that steady salary.
Use your company’s education dollars
Sharpen your skills on the company dime. Take classes that will improve your skills at this company or other employers down the line.
Apply for disability coverage while you’re still working
Personal disability coverage is increasingly important as companies continue to pare benefits. Group disability coverage can be threadbare if you have a lengthy illness or disability. Plus, it makes sense to buy personal disability coverage based on your current income. You won’t be able to buy as much if your income goes down.
Apply for your child’s college financial aid while you’re working
If you have a child in college or ready to go to college, make sure you have filled out the FAFSA – the Free Application for Student Financial Aid – on time. Even if you don’t need the money now, there are hardship forms that can be filled out later in case your child needs the aid and you’re without a job.
Understand your benefits
If you are laid off, you will qualify for a continuation of your employer’s health insurance benefits through COBRA. The federal Consolidated Omnibus Budget Reconciliation Act allows an individual to buy coverage from his former company for 18 months (or more in certain situations) due to employment termination or reduction of hours of work. You’ll end up paying the amount of your total premium since the boss doesn’t have to pay his share anymore, but at least your coverage won’t change. If you’re married, see if you can switch to your spouse’s health coverage – it might save more money than going COBRA. Also, check out what your unemployment benefit will be ahead of time so you can budget.
Stay away from your 401(k)
The possibility of losing your job is an excellent reason never to take out a 401(k) loan. You’ll need to pay it back before your last day at work. And don’t even think about tapping retirement savings if things get tough. Find another way to shore up your cash flow.
This column is produced by the Financial Planning Association (FPA), the leadership and advocacy organization connecting those who provide, support and benefit from professional financial planning.
Get a line of credit while you’re still working
Im not sure if I will agree with this one. I rather advice you to “save up” money while you are working. Than to do that.
Or don’t rely on just one job. Look for freelancing opportunities and other part-time jobs.
I don’t think there is a better advice than building an emergency fund in terms of preparing for a layoff. My former supervisor was laid off and it took him 9 months to find a job! He did take his time to find what he thought was the “right” job though since he had savings.
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Final tip: Remember that you are not your job! Layoffs happen, to the prepared and unprepared.
[...] “Should I quit from my job?”, you might ask. I will promptly answer, “No”. But if you ever think of quitting, then you should prepare for unemployment. I am not the one to answer for everyone but I really don’t see any financial security in having a job. There are just so many reasons not to have a job and I intend to resign in a couple of years. I would then start to build a business to generate income for me. [...]
Great post and one to bookmark for future reference. I have put down a list of things I think one should do to prepare for a lay off at my personal blog. Shares a number of items with your list.
Thanks, Andy.
Andy, as the economy gets worse it wouldn’t be a bad idea for everyone to do a little contingency planning.
My husband lost his job 3 months ago.
Prior to that:
-we built up 9 months of living expenses in savings
-we bought a fourplex that generates a positive cash flow of 1k/month
-we paid off all high interest debt
After the layoffs we:
-cut back on all non-essential spending (zero eating out, no more trips to nearby city/shopping center)
-called our student loans to get interest only payments for the next 6 months (we can do that again)
-try to earn more through freelance work until a real job comes up
In our experience RRSP’s are a horrible investment since it’s not there for you when things go bad.. our fourplex is way better then that. (Tax advantageous, we can get money out every month instead of putting more in etc…)