How to Stay Out of Debt When You Lose Your Job

May 7, 2013

Lost a JobThe economy is finally showing legitimate signs of recovery from the last recession. But millions of people are carrying large amounts of debt owing to long periods of unemployment experienced during the downturn. That experience should strengthen your resolve to avoid the same fate in the future.

How can you stay out of debt when you lose your job? The answer to that question can be given in three parts – what to do before, during, and after a job loss.

What to Do Before You Lose Your Job

People often know several weeks, or even months, before a job loss hits. There are various signs – the company is making drastic cuts in spending, other people are losing their jobs, and there are negative forecasts for the immediate future. If it looks as if a job loss will be in the near future, it is important to take steps now to begin preparing for what will come later.

1. Cut back on unnecessary spending.

One of the main reasons people go into debt is that they continue their spending patterns, certain they will get a new job soon. Better strategy: assume that your unemployment will last for many months. That will put you in the proper mindset to deal with the crisis that is coming. You should start planning immediately to cut back on any unnecessary expenses. That might include cable TV, landline telephones, gym memberships or any other amenities that you may not be able to afford on an unemployment check.

2. Save every dollar that you can.

The more that you can rely on savings, the less that you will need to use debt to cover your expenses. No matter how much or how little savings you have, start working now to increase your stash. The more you can save now, the easier it will be later.

3. If you believe that you will need financial help, line it up before the ax falls.

Most people don’t ask for help until they are past the point of desperation. In the meantime, they borrow money to put on the “all is well” face. Instead, if you believe that you will need financial help, it will be best to line it up before it is actually needed. This could mean getting financial help from family and friends, or even lining up a temporary job that will pay a lot more than unemployment.

What to Do Immediately After You Lose Your Job

Even if you’re pretty certain you’re going to lose your job, you will still have hope of keeping it up until the day that you lose it. But once you’re actually released, it could be panic time. The way to avoid that is by having a plan in place to begin moving you forward.

1. Put your credit cards away.

Denial is part of human nature, and often in the face of a job loss people will try to dull the pain by continuing to live the same lifestyle they always have. If you’re using credit cards in order to make that happen you’re courting disaster. Put your credit cards away in a safe place. And from now on, use your emergency fund for necessary living expenses, and let your credit cards become your new emergency fund.

2. Make the minimum payment on any debts that you have.

Some people “get religious” about their credit cards upon the loss of a job. But at that point, it is too late to worry about paying off any debts. Your main focus now will be survival, not paying off your debts. In order to keep your living expenses to a minimum, make the minimum payments on your debts that you can get away with.

3. Make looking for a job your new full-time job.

When you lose your job, think of it less as a job loss, and more as moving from one job to another. Your new job will be looking for a job – and it must be a full-time effort. From a financial standpoint, the most important strategy in dealing with unemployment is to make the time you spend in it as short as possible.

What You Can Do Going Forward

When you finally land a new job, it’s time to sit back and celebrate – but not for too long. Coming fresh off of a job loss is the very best time to begin preparing for the next one. The experience and the strategies that you used will be fresh on your mind, and so will the motivation.

1. Now is the time to pay off your debt.

Once you have a new job, you’ll be faced with an important decision: eliminate your debt once and for all, or go back to your previous lifestyle and spending habits. Eliminating your debts will be one of the best preparations for a future job loss. If you do lose your job, you’ll face it with a clean debt slate. And if you keep on working forever, you’ll have that much more money to put into savings and investments.

2. Rebuild your emergency fund, but make it even bigger.

You will also want to begin replenishing your emergency fund, which is probably empty. But you don’t just want to restore it to your previous balance before unemployment, you want to make it a lot bigger. Whether you are employed or unemployed, the more that you can live off of savings, the less that you need to rely on debt.

3. Look for ways to cut costs across your budget.

With the unemployment experience fresh on your mind, now is the very best time to begin making permanent cuts in your budget. You’ll be doing it at a calm time in your life, and you may actually find this to be easier than when you were unemployed. Any expenses that you are able to cut out of your budget will leave you more money to pay off old debts and increase your savings.

When you’re facing unemployment, debt should always be a last resort as a source of funds. The more you borrow when you’re unemployed, the more that you’ll have to pay back when you have a job. That will cast your unemployment shadow months or even years into the future, reducing the advantage that a new job will bring.

If you went through a long period of unemployment, did you run up your debts as a way to survive? Have you been able to repay them since being re-employed? Leave a comment!


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Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids and can be followed on Twitter at @OutOfYourRut.

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2 Responses to How to Stay Out of Debt When You Lose Your Job

  • KC @ genxfinance

    Yeah, it’s a toughie losing a job. A lot seems to be spending more when are unemployed. These are good tips to during this kind of circumstance. I would recommended these are well. What’s even more amazing is the follow up points to do once you’ve finally landed a job. It’s about having a plan and knowing how to manage your finances well so that it won’t happen to you again.

    • Kevin

      Hi KC–I think of it as being kind of like piloting a ship. You set your course, knowing that you’ll be banged around by storms, but no matter what, you have to focus on the final destination. Tony Robbins described that as always focusing on True North. Not easy to do when you have no income, but entirely necessary.