Steve Coker, CFP
Think You May Be Laid-off From Your Job? Here Are 9 Things You Should Do Now To Prepare Financially
Facing a “reduction in force” in corporate America today seems like a common occurrence. When the rumor mill gets started it can be a stressful time. The best way to combat the stress is to have a solid financial plan to navigate a lay-off if it happens. Here are 9 things that you can do now to start preparing your personal finances and feel confident that you can weather whatever comes.
1. Get organized
Setting up a proper budget and living within your means are consistent themes when it comes to financial advice. If you haven’t set up a budget, now is the time to get serious. One of my favorite tools is Mint.com. It is a free website that helps you track your spending. Once you can track your spending, you can be intentional about where you spend.
2. Build a cash reserve
A cash reserve is always a good idea, but when you think your job is at risk having a little extra cash on hand can give you a lot of peace of mind. Reevaluate everything in your budget to cut the fat and start adding to savings. This also means delaying any large purchases – so keep the old car for now. Cash gives you time to find the next job.
3. Review your mortgage
If it makes financial sense, consider refinancing your mortgage to get the monthly payment down. If interest rates have come down then this can be a good idea anyway. The focus during this time is reducing your monthly outflow, so if you have a 15-year mortgage consider moving to a 30. If you have been making extra payments, consider stopping this practice until this storm is passed. Don’t get me wrong, paying off the mortgage is a good idea, but not while you are in the midst of a layoff. Remember that refinancing while you are out of work can be difficult or impossible, and you will need to be open with your situation, so it is best to explore your options while the layoffs are still in the ‘rumor’ stage.
4. Consider opening a Home Equity Line of Credit
If your mortgage is already in good shape, consider opening a Home Equity Line of Credit (HELOC). Most banks will allow you to open a HELOC at little to no cost, and you don’t have to borrow money unless you need it. Again, once a layoff happens this option may be closed to you, so it is important to set up a HELOC before the crisis hits. Don’t get me wrong, I hate debt, but having the flexibility to get short-term cash while you are out of work can buy you some more time to get that next job.
5. Pay off that 401K loan
If you already have a cash reserve, consider paying off your 401K loan. Why? If you leave your company the entire balance of your 401K loan is often due within 60 days. This may not be a problem if you are 55 years old or older in the year you leave the company. But if you default on the loan while you are younger the principal balance will generally be taxable income to you and you will be accessed a 10% federal penalty for early withdrawal. This is not a disaster, but you should avoid it if you can. Pay this debt down first. If you have any questions about the taxability of the default, talk with your HR department, or consult with an advisor.
6. Take the overtime or find a part-time job
Having a little bit of income can make a big difference, so consider accepting any overtime at your current job. If there is none available, consider picking up a part-time job now. If your spouse is not working perhaps it is time to consider that option. The idea here is to take those steps before there is a crisis. The extra money can be used to build your cash reserve now, and if the layoff happens, you will already have another income stream to help fill the gap.
7. Review your health benefits
Providing for health care once you have been laid-off can be one of the most difficult and expensive challenges. If your employer has 20 or more employees, the company will be required by federal law to offer you the option to pay for an extension of your existing coverage. This is known as COBRA. Unfortunately, COBRA can be very expensive. If your spouse also has health coverage, review the enrollment provisions. Most large companies have special enrollment, which allows the immediate addition of a family member without having to wait for the annual enrollment period. However, this is not a given. If open enrollment is coming up it may be time to shift the kids to your spouse’s plan while you can.
8. Review your retirement benefits
Your 401K is best used for your retirement, not for layoffs. Having said that, sometimes you have no other choice than to tap into these funds. First, if a layoff is probable and your cash reserve is not where it should be, then it may be best to reduce the amount of money you are putting into your 401K. While you build your cash reserve, consider reducing your contributions to only the amount of your company match. Secondly, know your options for your 401K. When you are laid off there are several tax exceptions that can allow you to get access to your 401K without penalty. Two of the most common are a provision that will allow you to pull money out of your 401K to pay for COBRA. Also, depending on your age, there are exceptions that will allow getting access to your funds before the normal 59.5. How you pull out the funds matters, so consult with an advisor before you move your retirement accounts.
9. Don’t stress
Often, a layoff can lead to an even better opportunity. Be open to exploring new opportunities. Yes, this can be a stressful time, but it doesn’t have to be a negative one. By taking the steps above, you will have the time to explore new jobs that will put you in an even better place.