Posted on: Saturday, June 21, 2008
Facing a layoff? Start stashing cash
By Michelle Singletary
If you have lost your job or are facing a layoff, you need a plan for coping financially. This is especially true if you haven't been able to build an emergency fund or you've been living too high and have never considered there might be a disruption in your income.
Let's start with some tips for folks who are still employed but know they won't have a job for long.
Here's how to prepare for that pink slip:
If you haven't built up an adequate emergency fund, stop your retirement contributions. When faced with monthly bills and no paychecks, you need to stockpile as much cash as possible. If you were to contribute that extra cash to your 401(k) and later need it during an unemployment stint, you could be looking at a 10 percent penalty in addition to income taxes.
Lower the withholding on your remaining paychecks. Your taxable gross income is likely to be lower for the year even if you find a new job in a few months.
Make the minimum payment on your credit card. Again, you need to begin saving as much cash as possible for essentials — the rent or mortgage, food and utilities. Once you are employed again and out of financial danger, return to aggressively paying down that debt.
Review your budget (I hope you have one) and cut every expense that is not a necessity. This suggestion may appear simplistic, but many folks facing a job loss don't move fast enough to cut expenses. People waste money on high cell phone bills or allow their teens to continue texting. Only after the paychecks stop do they panic and begin to cut.
The time to start cutting back is the day you know or are pretty sure you're being laid off. Get the least-expensive plan possible, with the fewest minutes, and actually use the phone only for emergencies or as a contact during the job search. Or, be radical and cut out the service altogether.
If you eat out less and cut entertainment expenses, you could find $200 to $300 in your budget, which will at least help pay for (some) gas to look for another job.
Here are some things to consider if you've lost your job:
Cut expenses without delay.
Apply for unemployment if you're eligible. Don't be too proud. Unemployment is an insurance fund that has been funded on your behalf by your employer.
If you can, maintain your health insurance. Employers are required by law to offer the option of continuing your health insurance for up to 18 months through the health benefit provisions of COBRA (the Consolidated Omnibus Budget Reconciliation Act of 1986). The problem for many people is that they have to pay the full amount for the coverage plus an administrative charge.
Tap into retirement money only if things have become dire. By that I mean you are running out of food or you've exhausted every means to pay your mortgage or rent. You may be able to take a "hardship withdrawal" from your plan, if it's allowed by your former employer. A hardship withdrawal is not a loan. You can't put the money back into your portfolio later.
Also, the withdrawals are subject to taxes and a 10 percent penalty if you are not at least 59 1/2. Check with the plan provider to see if it allows for hardship distributions and under what conditions.
