We have had a strong job market for a while now and unemployment has stayed near historic lows once everyone got back to work from the pandemic. The way things have been the last couple of years, the thought of getting laid off hasn’t even occurred to most workers.
However, recent layoffs in tech companies have brought layoffs back to the forefront of many people’s minds. Being laid off is a scary idea for most people because it is filled with so many unknowns. A little planning and forethought can help erase some of those unknowns and give you more peace of mind.
How to Position Yourself to Weather a Layoff
There are some things you can do to prepare for a layoff. In fact, even if you never get laid off, you'll be glad that you did them because they’re just plain smart financial planning moves.
Build an Emergency Fund
We tell all of our clients that the first line of defense in financial planning is having an emergency fund. It’s important to build up emergency reserves while you have money coming in so that you have something to live off of in case your income ever goes away. We typically recommend having three to six months’ worth of expenses set aside as an emergency fund. Where in that range you should aim will depend on how many income sources your household has, the dependability of that income, and your overall comfort level and sense of security.
Understand Your Cash Flow
The next most important thing is understanding your cash flow. We recommend that everyone does what it takes to have a good handle on what money they have coming in and what they’re spending it on. There are a lot of different apps and budgeting systems available to help you do this, and we even did a deep-dive on one recently.
If you get laid off, you’ll need to be able to look at your cash flow to see what your essential expenses are and what can be easily cut. When you already have a budget or a form of tracking expenses in place, then that’s easy. You can effortlessly see what the bare minimum you need to live on is, which is important information even if you don’t actually cut back your spending to that level.
Know What You Own
A net worth statement is simply a document that lays out everything you own and everything you owe. It is one of the foundational financial documents for both individuals and businesses and something that we include in every financial plan we create and update in every client review meeting. Having an up-to-date net worth statement can be helpful when you’re laid off because you can quickly and easily see all of the resources available to you.
Limit Your Debt
Your bills will keep coming whether you’re working or not. Thus, it’s wise to limit what you owe and are committed to paying on a monthly basis. Paying down debt, especially high-interest credit card debt, will help to prepare you for being laid off because having fewer monthly financial commitments will make your emergency fund last longer and give you more breathing room.
What to Do If You Get Laid Off
The above suggestions are all things that you can do while you’re still working to put yourself in a better position if you get laid off—or even if you don’t. But what do you do when you actually get laid off and it’s too late to build that emergency fund?
Take Stock of Your Financial Situation
The day you get laid off, you should go home and take a look at your net worth statement and that cash flow that you have been tracking so diligently. Here’s a math equation that will come in handy:
Emergency Fund ➗Monthly Essential Expenses Time to Find a Job
The first thing you’ll want to do is figure out how long you have before you need an income again because that will have a major impact on your job search. Let’s say you’ve got a $30,000 emergency fund and your monthly expenses are $5,000 because you got your debt paid off. That means you have 6 months that you can spend not only looking for a job, but looking for the right job. On the other hand, let’s say you didn’t get your debt paid off so your monthly expenses are $9,000. Now you only have three months before you need to start generating some income.
Remember, the smaller you can make the denominator in that equation, your monthly expenses, the longer your emergency fund will last you.
Take Advantage of Employer Benefits
If you’re given notice that your job is being terminated but it isn’t immediate, there are some things you should try to do while you’re still with your employer. Consider getting any medical work that you need done while you’re still on your employer’s insurance. If you have a Flexible Spending Account (FSA), use the funds while you still can. If you have employee stock options, you may need to exercise them before your employment is terminated.
Get Insurance Coverage in Place
Health insurance is important, so make sure to review your options and have something in place once you’re no longer working. Some potential options would be to stay on your employer’s plan through COBRA, purchase insurance on your state’s exchange, join a medical cost-sharing program, or try to get onto your spouse’s employer-provided insurance.
Life insurance is also very important and often tied to employment. If you only have life insurance through your employer, buy yourself an individual policy before you lose your employer’s coverage.
Do Strategic Financial Planning
As with everything in life, there may be a silver lining, or benefits to getting laid off. From a financial planning perspective, there could be some good opportunities tied to this bad situation. First of all, you can roll money out of your 401(k) once you leave your employer. If your 401(k) only has high-cost investments or undesirable investment options, this is your chance for your money to escape those. Rolling your 401(k) funds into an IRA can open up a plethora of investment options, including some with much lower fees. Getting your money into low-cost investments can have a significant impact on how much money you’ll have in the end.
Another option if you have a prolonged period without income may be Roth conversions. Traditional IRAs and 401(k)s are tax-deferred accounts, meaning you haven’t paid taxes on the money in the account yet so you will pay them when you take the funds out of the account. A Roth account is one where you have already paid the taxes so everything comes out tax-free. A Roth conversion is where you move money from a traditional, pre-tax account to a tax-free Roth account. You pay taxes in the process, but it may be worth it if you’re in a really low tax bracket due to being out of work. This is a more complicated financial planning strategy so we don’t recommend doing it on your own. Please work with a professional who can help you understand the tax and other implications.
The Most Important Thing to Do
We’ve talked about some practical things you can do to prepare for and respond to a layoff here. But the most important thing is to remember that God is in control and trust him as your provider and the one that sustains you. He says in Jeremiah 27:5, “With my great power and outstretched arm I made the earth and its people and the animals that are on it, and I give it to anyone I please.”
If you’re facing a layoff, or just want to get on top of your finances so that you’re better prepared for the unexpected, we can help. Schedule a call today to learn more about our financial planning services and who we are.