How to Protect Your Finances After a Job Loss

There are certain realities of life that most of us hope to never experience but millions of us do: the loss of a job or income. The Bureau of Labor Statistics says most of us will hold an average of 11.3 jobs during our lives and that we are each likely to face 5.4 bouts of unemployment. Regardless of the cause or circumstances, losing a job can be a difficult time.

If you are not prepared for unemployment, it can create long-lasting financial problems that extend months or years after you’re back at work. Even worse, it can hinder you from getting a replacement job if you don't pay your bills. The Society for Human Resource Management says 47 percent of all organizations now use credit background checks for some positions while 13 percent use them for all job openings.

So, what can you do to protect against hard times?

1. Save

I know it sounds like advice from some ancient pest, but if you don’t save when times are good, you’ll be in dire straits when times are tough. To protect or stretch out your savings when you’re unemployed, you must first have savings to defend. There’s no doubt that saving is hard, especially when many households live on the cusp of affordability. That said, there are always people who live on less, so saving is possible.

Some financial gurus argue that it pays to give up all luxuries and live on library books, beans and vacations in the park. That is not realistic for many people, but here is what can make sense: Cut spending to the bone. Eat out less often. If safe to drive, keep your car longer. Live in a smaller home with a smaller mortgage or rent. Pay off all credit card debt and make sure the balance is zero every month. Avoid late fees by paying on time. Use bonuses, overtime, tax refunds and birthday gifts to bulk up savings.

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Aim for a goal. For instance, why not try to have one year’s worth of mortgage or rent payments on hand. Does that sound difficult? How difficult will it be to pay if you lose your job?

In some cases, you may have retirement savings, but generally, it is best to leave such money untouched. Tap a retirement account and you could be hit with a stiff tax bill, a cost that makes some withdrawals very expensive. Moreover, you want to keep retirement money in place because if there are real financial problems such as a bankruptcy, retirement dollars can be protected.

Here is a somber fact: According to the Consumer Financial Protection Bureau the typical payday loan has a $392 balance. That means millions of households have so little in savings they need $400 in extremely high-cost debt to survive. A single emergency, the need for new tires, or a looming rent payment can push many households into distress. Don’t get caught in that trap. Protect yourself by saving.

Once you get off the debt treadmill, money used for late charges, strange fees and big bills will suddenly become cash in your pocket. Keep saving, but with money in the bank and with lower costs a few luxuries are okay. More importantly, you’re no longer a ‘wage slave’ living from paycheck to paycheck. You’re free, you have choices, and the more you’ve saved the more options you have.

2. Know the deal

It is common for company executives to negotiate severance agreements when they are first hired, but that’s not an option for most employees. However, at least for big companies, what you can do is ask for information regarding your entire ‘compensation package’ that covers details other than your salary.

You want to know this information because you may be entitled to certain compensation, perhaps a lot of compensation, when you leave a job for such things as unused vacation time, ongoing health coverage and in some cases a severance package, which includes a few months’ pay, and other assistance, such as help with a resume, job reassignment, etc. If your employer doesn’t provide these things, a local government agency probably does.

The more you can negotiate in advance, the less you will have to pull from savings if you end up unemployed.

3. Collect Unemployment Insurance

There’s no doubt that Unemployment Insurance is absolutely crucial for many who have lost their jobs. You paid unemployment insurance premiums when you held a job and that money is there for you in hard times, just like the premiums you’ve paid for health insurance or home insurance.

The rules for unemployment assistance vary by state, as do the amounts you might receive. If possible, you want a system where checks can be deposited electronically in your checking account so you don’t have to wait for the mail or physically pick up the money.

To protect your finances after the loss of a job, head directly to your nearest unemployment office and ask for assistance. The major questions to ask include how much you will get per week, how many weeks are covered, how the money is received and what information you need to communicate to the unemployment office after you file for benefits.

Be aware that federal and state governments may have an interest in your unemployment checks. As the IRS explains, “if you received unemployment compensation during the year, you must include it in gross income.” You may be able to have taxes withheld by the unemployment agency and you may be required to pay quarterly taxes. Speak with a tax professional for details.

4. Look for part-time work

While looking for a full-time job, it’s fine to take on part-time work as a way to keep some semblance of a cash flow. However, every dime you make needs to be reported to UI, so make sure it’s not going to compromise your living wages until you find a permanent position.

It can also be good to look for internships and other work that do not offer a paycheck but can help you learn new skills and get your foot in the door for a full-time position. For instance, in the restaurant industry it’s not unusual to have someone ‘trail’ in high-end kitchens to learn how the restaurant really works. In many firms and government offices, the use of unpaid interns is common, a way to get a foot in the door.

5. Find new sources of income

Life in the workforce can be very different from life without a job, so you’ll need to adapt. Take in a roommate or boarder, or sell crafts or goods on Craigslist or eBay. Look for informal jobs, such as being a dog walker, an Uber or Lyft driver, or retail work. Don’t let pride undermine your personal economics.

These may not be the jobs you want, but without a paycheck, times are different. You must preserve your savings and if that means taking on temporary work which is less than fulfilling, then that is what needs to happen.

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