How to Prepare Financially for a Job Loss
Even if you love what you do and aren’t looking to leave your company, it’s understandable if you’re sometimes on edge about your job situation — especially if you work in a sector that has been experiencing cutbacks.
Even if you do feel relatively secure, it’s always a good idea to prepare yourself for a potential job loss. Here are four money moves to make today that can help ease your stress about a potential loss of income.
Beef up your emergency fund
No matter what your situation is, it’s wise to have a fund designated for that inevitable rainy day. That’s where your emergency fund comes in. It’s generally a good plan to have access to funds for at least six months' worth of household expenses. However, keep in mind that without a job, you may also have to cover additional costs such as paying for health insurance on your own.
Also, consider that the uncertain economic conditions may mean you could be job hunting longer than expected. In general, the higher your income and the more experience you have, the more extensive the search. Combine that with the rising costs of most everyday staples, and you may want to increase your emergency fund to cover anywhere from nine to 12 months of expenses.
Take the time now to see how much is in your emergency fund and think about reducing or eliminating some unnecessary expenses to bump it up. Consider asking your credit card company to reduce your interest rate, cutting your grocery bill or making some simple swaps to save on electricity. You may also find some quick costs you can cut from your budget that you won’t feel too much. Living a little more conservatively for a while now can help you avoid having to make drastic lifestyle changes should a job loss or other emergency eventually occur.
Make sure you’re adequately insured
If you receive life insurance or disability insurance through your employer, you may lose that coverage if you lose your job. Find out if any policies you have through your company are portable, which means you’d be able to convert the work-affiliated group policies into personal policies if you left the company.
Now is also a good time to assess whether any personal coverage you have is sufficient: Between what your company offers and personal coverage, do you have enough short-term and long-term disability insurance to cover a good chunk of your income if an injury or illness sidelines you for a while? Is your life insurance coverage adequate to protect your family should something happen to you? The earlier you can secure life insurance, the more affordable it will be, so it’s wise to get coverage sooner rather than later.
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Assess additional options for accessing cash
While your emergency fund should be your first source for cash in the event of a job loss, you may need to pursue other options, though each has pros and cons:
Line of credit
Pros: Offers a new infusion of cash when you need it.
Cons: You’ll owe interest on the money you borrow. Qualifying for additional credit or a loan could be difficult if you are not employed (which means it might be a good idea to get this loan in place now while you can). You may end up taking on more debt than you can handle.
Permanent life insurance
Pros: It’s quick and relatively easy to get your money, and repayment can be flexible.
Cons: You need to have owned your permanent life insurance policy for a number of years before accruing any significant cash value, and much of the growth will depend on dividends, which aren’t guaranteed. Borrowing money against the cash value can also reduce your death benefit by the amount you borrow if you don’t pay the money back before you pass away. If not managed properly, a loan against your life insurance could result in your policy being surrendered, which could trigger a tax liability.
Pros: You’re using money that you already have, meaning that you won’t need to go into debt or pay interest on the money you access.
Cons: You may owe taxes on the investments you sell, and you’ll lose the opportunity for those investments to grow. In particular, try to avoid tapping retirement accounts for cash because you’re reducing the amount of savings you’ll have for retirement in the future. Withdrawing from these accounts early could also result in hefty penalties.
Talk to an advisor
In addition to building financial plans that are designed to help you achieve all your goals in life, financial advisors will typically also help you plan for things that could go wrong. Having a financial plan in place when you lose your job can go a long way to helping you feel more comfortable about how you’ll manage financially. Your advisor will also be able to help you make strategic choices about where to pull money from so that you stay in a strong financial position while you search for your next opportunity.
Loans taken against a life insurance policy can have adverse effects if not managed properly. Policy loans and automatic premium loans, including any accrued interest, must be repaid in cash or from policy values upon surrender, lapse or the death of the insured. Repayment of loans from policy values upon surrender or lapse can trigger a potentially significant tax liability and there may be little or no cash value remaining in the policy to pay the tax. The policy will lapse if loans become equal to the cash value while the policy is in force and additional cash payments are not made.