Managing Finances While Unemployed

Be Prepared for Unemployment

• Reach out for help and plan ahead. Take advantage of benefits such as state unemployment assistance, employer-provided outplacement services, and financial counseling.
• Try to negotiate an enhanced severance package, if possible, and apply for public assistance (food stamps, for example) if eligible.
• If you sense a layoff coming, or have time until an announced downsizing takes effect, try to save at least three months’ worth of expenses while reducing household debt and discretionary spending.
• Apply for a home equity line of credit while you are still employed. That way, you will have it in case you need it and the interest rate will be lower than most credit cards.
• Make dental and medical care appointments while you still have coverage.
• If you get severance pay, set aside 35 percent to 40 percent for income taxes.

Keep Your Insurance, Pay Your Bills

• Maintain health insurance coverage and notify your creditors that you have lost your job. A federal law called COBRA requires companies with 20 or more employees to continue health-care coverage for 18 months after a layoff. Departing workers must pay the full cost plus a 2 percent fee and must apply for COBRA benefits within 60 days of termination.
• If you anticipate difficulty paying bills, contact your creditors to explain your job loss and request reduced payments or an extension of time to pay bills.
• If you own a home, you may be able to arrange a forbearance agreement with your mortgage lender that enables you to pay nothing or make a partial payment for a set period of time.
• In cases of unemployment, another option to consider is a nonprofit credit counseling agency that can negotiate with creditors on your behalf.
• Try not to cash in tax-deferred retirement plan assets to pay living expenses while you are unemployed. A job loss is usually a temporary situation while retirement can last for decades. If you must tap into this money, repay it within 60 days to avoid income taxes and the 10 percent penalty on premature withdrawals before age 59 1/2.
• If you withdraw from a retirement plan, withdraw only what is truly needed. If necessary, consider lifestyle adjustments such as selling a car or other valuable property or taking in a roommate.
• You might be able to consolidate debts or refinance them to reduce living costs. If you take a loan against your 401(k), you will likely have 60 to 90 days to repay it or you’ll owe taxes and possibly penalties on the outstanding balance.