Financially Preparing For a LayoffSubmitted by Castlebar Asset Management on May 19th, 2016
“An ounce of prevention is worth a pound of cure.” – Benjamin Franklin
Layoffs may not be in your immediate future, but just like the quote from Ben Franklin – preparation is key. Preparing in advance of any layoff will offer you flexibility in the event you are called into your boss’s office unexpectedly. Financially you need to put you and your family in a position to be able to withstand the loss of income, cash flow. This will provide you enough time to prepare and find the right job for your career. Ideally you want to limit the disruptions to your family’s life as well as your short and long term financial goals.
The first priority is make sure your rainy day or emergency fund is in good shape. We typically recommend clients have three to six months of expenses in some type of savings. This could be checking, savings, money market and or CDs. You don’t want this money exposed to risk of loss by investing in the markets. If you feel your rainy day fund is not up to par than create a plan to raise your savings amount. Six months of expenses is an ideal amount because it will provide you with enough time to find another position and minimize stress. If you work in a field where it could take you much longer to find a job you might consider raising the six month threshold to nine months or even a year.
To figure out how much you need to save in your rainy day fund you need to know how much you are spending. Look closely at your monthly budget. If you are not currently tracking your spending and feel like a layoff could impact you, let this motivate you. This is not a fun task, but if your cash flow is impacted than you will need to know where you are spending money. If you do get laid off, then you’ll want to know what levers you can pull to save money. Your family may be a dual income household where you and your spouse work. It is still important to understand your budget even if you think you’ll be able to cover your living expenses on one income.
If you don’t think you’ll be able to get your emergency fund topped off before a lay off or you would like to just have an extra level of protection, you could open a line of credit. A home equity line of credit (HELOC) can serve as an additional backstop. It is better to put the wheels in motion on a HELOC while you have a job. It is possible to get a HELOC if you are out of work. The process will be more time consuming and you’ll want to focus on your job search rather than dealing with an underwriter at a bank. I encounter some people who are tempted to access the credit line if they know it is out there. They’ll redo their kitchen, master bathroom or even spend this “newly found” money on their already bad financial habits. If this describes you then proceed with caution if you get a HELOC.
If you are not a home owner or don’t have enough home equity you could pursue an unsecured line of credit from a credit union or use an investment account as collateral. You typically pay a higher interest rate, but it is better than withdrawing money and having to pay capital gains taxes. These are better alternatives than putting expenses on a credit card and letting the balances build up. You do need to remember these are loans, you will have to pay them back!
Loans from your 401k can become a big problem if you expect a lay off is coming. If you are laid off, typically your loan will have to be repaid in a short period of time (usually 60 days). Financially if you are not in the position to repay your 401k loan once you are laid off than it will be treated as a distribution. If you are under the age of 59.5 you are paying a penalty and are taxed on that money. This makes a bad situation worse. I am not a fan of 401k loans but they can be a last resort for some people. You will want to clean up any 401k loans ASAP if you are expecting your company to downsize jobs.
Your retirement accounts like a 401k or IRA may seem like a tempting source of funds if you lose your job. The common thought is you have plenty of time until retirement to make up any lost ground by taking an early distribution. You may be able to add to your account over time but you’ll be missing out on compounded returns, not to mention having to pay taxes and penalties today. Access your retirement accounts only as a last resort because they will have an impact on your long term financial plans.
Hold off on any significant purchases. Buying a larger house, upgrading cars or other action that may increase your monthly budget is something you should avoid.
If you sense a lay off is coming I strongly encourage you to meet with a personal financial advisor. They will be able to help set a course to minimize the financial stress you feel during your time out of work while keeping your long term goals in focus. The fear of not having a job and fear of financial stresses hit about the same time once you lose your job. Even if your spouse is working and can cover your expenses, the peace of mind knowing you have a personal financial plan will give you more confidence in your job search.
Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.