SURVIVING A JOB LOSS

By: Justin Druckenmiller

IT’S HARD TO GAUGE HOW LONG you’ll be out of work in the event of a job loss, so it’s always safe to prepare for at least six months of unemployment. Come up with a financial plan for unemployment and design it with some flexibility to allow for adjustments if your situation changes.

PREPARE A SURVIVAL BUDGET

A vital piece of your unemployment plan is a budget. Start with a list of all of your income and expenses. You might already have a budget you can use as a base, but your survival budget should be a bare-bones version of your regular budget. Include only expenses that are necessities. Your plan should also include an emergency fund that’s equal to at least six months of living expenses, which will help supplement your other sources of income.

IF YOU LOSE YOUR JOB, FIND ANOTHER SOURCE OF INCOME

Start by checking with your former employer. Are you eligible for severance pay? This will depend on your employer’s policy, but if you’re offered severance pay, you may have the option of taking it in a lump sum or as a continuation of your salary for a fixed period of time. Taking severance in a lump sum gives you control over your money, but you may lose some employee benefits such as group health insurance.

REDUCE YOUR CURRENT EXPENSES

If you’re unemployed, you may soon find that your income won’t support your current expenses. Aside from reducing your debt by selling big-ticket items like your car or house, you can do several things to minimize your living expenses. First, identify and discontinue discretionary expenses. Items such as magazine subscriptions, health club memberships, extra phone services, credit cards you don’t use that have annual fees, dining out regularly and cable television are examples of some expenses you can trim from your budget, if they currently exist.

TALK WITH YOUR CREDITORS

Another way to cut your expenses is to negotiate with your creditors to lower interest rates on your credit cards, defer a payment or two on your car loan or temporarily reduce your monthly payments. You may be able to lower your monthly home mortgage payments by refinancing to a lower rate (if you can qualify in spite of your job loss), or by negotiating a longer repayment period. You’ll have to admit that you’re facing some financial difficulty due to your job loss, but if your credit is good, now’s the time to make the calls—not when you fall behind in your payments.

INCREASE YOUR CURRENT INCOME

Consider a part-time or temporary job. This will provide another source of supplementary income while you search for your next full-time job. And your part-time job could turn out to be your next full-time job, or at least lead to another opportunity with a potential employer.

THE LAST RESORT

Your home is another source of savings that you may be able to tap into. If you have enough equity in your home, sometimes you can obtain a home equity line of credit even if you’ve lost your job. You’ll only pay interest on the portion you use. But you’ll still have to make a monthly payment, so make sure you’re able to afford the new loan payments before you put your house on the line. If you’re still strapped for cash, consider withdrawing from your retirement accounts, such as your IRA or employer-sponsored retirement plan. But be aware that this course of action does have drawbacks. Any money you withdraw from these types of accounts will likely be taxed as ordinary income for the year in which you make the withdrawal. ✪

Note: If  you’re considering taking funds from your IRA or retirement plan, you should consult a tax advisor regarding the specific tax treatment of  your withdrawal. This article is meant to be general in nature and should not be construed as investment or financial advice related to your personal situation. Please consult your financial advisor prior to making financial decisions. Justin Druckenmiller is a Financial Advisor with Waddell & Reed, Inc. and can be reached at jdruckenmiller@wradvisors or

615-399-0128. Waddell and Reed, Inc. Member SIPC.

Tags: Pocket Change

This entry was posted on Thursday, January 28th, 2010 at 10:39 pm and is filed under Pocket Change. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.