Uncertainty in the job market has many workers wondering what will happen if they are laid off. An unexpected layoff can disrupt not just your income but also your daily life.
No one can predict the future, but you can do your best to prepare for it. Fortifying your financial landscape to withstand economic trembles or an unstable job market can alleviate stress and enhance your resiliency.
Let’s walk through what you can do to get your financial house in order to mitigate the impact if you’re faced with a layoff.
Build a Comprehensive Emergency Fund
A job layoff is exactly the type of unexpected event that an emergency fund is built for. It is meant to sustain your basic needs until you can find new employment.
Used wisely, an emergency fund pays the mortgage, keeps the utilities turned on, and puts food in the refrigerator. How long it can sustain you depends on how much of a reserve you have built up.
Break down your emergency fund into categories based on necessity, such as your mortgage or rent, utility bills, insurance payments, transportation, groceries, or prescriptions. Focus on what will shore up your household’s basic needs while in crisis mode rather than on discretionary spending like entertainment or dining out. The rule of thumb for an emergency fund is to set aside between three-to-six months of income to cover basic expenses.
Once you’ve determined how much you need to set aside for your emergency fund, where do you put it? An emergency fund needs to remain liquid so you can access it quickly. But it is also a substantial amount of money so you want it in an account that offers a higher interest rate than a regular savings account. Consider a money market account or high-yield savings account.
An automatic transfer from your checking account to your savings account can help you build your emergency fund systematically. It tracks with the “pay yourself first” concept of saving before you spend so you can weather uncertain times.
Reduce Debt
If you are laid off from work, you don’t want the stress of figuring out how to pay off high-interest debt. Make paying off credit cards and loans a priority. You can one of two debt reduction strategies, debt avalanche or debt snowball. The debt avalanche method calls for paying off high-interest debt first. It saves you the most money because you’re reducing how much debt is costing you. The second method, debt snowball, pays off the smallest debts first. It’s a motivational strategy because you’re seeing progress faster as small debts disappear.
Maximize Unemployment Benefits and Safety Nets
Now that you’ve built your emergency fund and paid off debt, it’s time to think about protecting and maximizing your assets. The first place to start is thinking about how to file for unemployment benefits.
If you know a layoff is coming or suspect that one is, start documenting everything. Save any communications with your human resources department and keep a record of any meetings you have about a potential layoff. Some states offer more unemployment benefits if you’re laid off rather than if you quit voluntarily (such as accepting a buyout), so learn what your options are and how they may impact you. Apply for unemployment benefits immediately after you’re laid off because it can take weeks for them to kick in. Remember that unemployment benefits are taxable.
In some cases, you can have federal taxes automatically withheld from your unemployment payments to avoid a large tax bill later. Check with your state’s unemployment benefits office on how taxes are handled.
Understand Your Legal Options
One of the best experts you can have on your team alongside your doctor and insurance agent, is a good employment attorney. Have that attorney review any documents you’re asked to sign. If offered a severance package, don’t sign immediately. It’s worth negotiating for a better deal, especially if you’ve been with the company for a long time. Ask for more severance pay, extended health insurance, or outplacement services. An employment attorney can help you negotiate a better offer.
This is particularly true if you have a non-compete or non-disclosure agreement, make sure you understand what that entails for future employment. Consult an attorney to ensure your rights are protected.
Manage Emotional Resilience Through Change
Years ago when I was offered a buyout from an editing job with a political magazine, I walked away with a pretty great severance package – a full year’s salary and benefits. But there was still an impending and persistent sense of dread. I still needed to find new employment. With all the churn in the company, it was a mental drain to even think about job search. Financially I was luckier than most, but the gut-wrenching sense of doom was substantial. I wound up being out of work for three years.
The run-up to actual layoffs in a company can be emotionally charged and mentally draining. So it is important to shift your mindset from fear of losing your job to seeing the layoff as an opportunity to explore new passions or careers. Sometimes it is the professional shift that may have been needed.
My friend was recently laid off after several years working for a nonprofit organization. The leadership promised her promotions and an eventual managerial role. But she was always disappointed.
She held on through a messy reorganization, hoping that she would finally land a managerial role. Instead, she was unceremoniously and unexpectedly laid off. While it was devastating to be booted out of an organization she had been loyal to for seven years, she found herself in a new role several months later that paid her more money and gave her a management position almost immediately.
Shift your mindset from the fear of losing your job to seeing the layoff as an opportunity to explore new passions, industries, or careers. Many successful people have experienced setbacks, and those moments often set the stage for future growth.
Review our Ultimate Job Layoff Toolkit for actions you can take once a layoff happens.
