When Life Happens – Loss of a Job

Losing a job. When it happens, it can seem like the end of the world, especially in today’s world.

Here’s the truth, though:  It’s not.

While this article focuses on the financial and tax aspects of this particular life event, there are other things to be considered besides finances:

• You should not view your job as your self-worth.
• You need a plan for getting another job.
• You need to tap into professional connections.
• You need a professionally prepared resume.
• You must be active in the pursuit of another job.
• You should be flexible

Each of these non-financial areas should be considered and prepared while you have a job.

Throughout your life, it’s crucial to develop a healthy work-life balance that puts your employment in its rightful place.

Throughout your career, it’s key for you to grow continually, allowing yourself to be challenged while also developing professional contacts.

If you wait to work on these things until the day you receive the dreaded pink slip, it will put you seriously behind the eight ball. If you’re prepared, however, having these systems and relationships in place can give you the confidence to move forward without qualms during a tough time.

There are plenty of books, blogs, and coaches out there to help in developing this part of your career as you go; we won’t belabor the points imperfectly here. 

One final word about those non-financial area, however:  You make a very big mistake if you convince yourself that you simply don’t have time for those things. Fostering a proper work-life balance, developing yourself professionally, and establishing professional connections are vital pieces of any sensible career, and they’re worth far more than the expense of sinking time into them.

Let’s move on to the financial and tax aspects of losing a job:

Planning for the Unexpected

Who sits down and plans for losing their job?

If you phrase it like that, probably no one.

Try this:  Who sits down and plans for unexpected, negative events to occur in life?

Answer:  Everyone who has worked out a holistic, integrated financial plan!

Very near the beginning of the steps of a financial plan is:

Set aside your emergency fund… IN CASH!

How much that is depends on several factors.  For example:

• how much you spend each month
• your family situation, from number of children to living space
• whether you are the only earner in your family

If you are single, you probably should have at least six months of living expenses set aside.

If you are married and both of you work, then maybe you need three months of living expenses set aside.

If you are married, but only one of you is in the workforce, then you should probably have six months to a year of living expenses set aside.

How much you’ll need is determined by your own personal situation and is largely driven by the spending plan that you have developed as part of your holistic financial plan.

We’re often asked where this money should be kept.  The answer is not “under your mattress.” It should be kept in a savings account where it is totally accessible.  Nowadays, there are plenty of online banks that have savings accounts paying, generally, a larger interest rate than a brick and mortar bank. Look around.

Without this emergency fund in place, the loss of a job can be utterly devastating; not only a hard hit emotionally, but an untenable financial burden as well. You and your family may be driven to the use of credit cards to survive, which can snowball into long-term financial stress.

Having an emergency fund in place allows you and your family the space to breathe while you deliberately position yourself for life’s next step.

Unemployment Pay

The day after losing your job, make it a priority to make sure that your bills are paid.

Also, it’s of paramount importance to preserve your emergency fund as much as you can—so you should consider immediately filing for unemployment.

There should be no wounded pride associated with applying for unemployment.  Throughout your working life, your employer is required by both federal and state law to pay Unemployment Insurance. For the employer, this is a component of the payroll taxes that they pay for every employee.

Since this money has already been paid on your behalf, if you do not file for it, you’re simply leaving that money on the table.

The amount you would draw from unemployment will likely not cover all the bills you had prior to losing your job; it will serve as supplemental support.  It will allow you to take less from your emergency fund, at least, and it will hopefully also allow you to avoid falling into using credit cards to pay for everyday living expenses.

One significant thing to remember about unemployment:  IT IS TAXABLE INCOME.

When you file for unemployment, you have the option to have federal income tax withheld from your unemployment checks, and that would absolutely be a prudent thing to do.  What we see most often with virtually every client of ours who has drawn unemployment through the years, however, is that they do not have any tax withheld. If you do the same, remember you will still have to include it in taxable income on your tax return.

Recalculate Your Spending Plan

If you’re paying close attention to your spending plan on a monthly basis, then—when an emergency arrives—you should be able to quickly reevaluate and make some tactical changes for the short-term.

In fact, you should look at your spending plan on a periodic basis and evaluate it with the following two questions:

• What is necessary?
• What is discretionary?

The “necessary” category obviously includes things like mortgage payments (or rent), student loan payments, car payments and expenses, utilities, and insurance payments. You get the picture: those things that you really cannot change or eliminate in the short-term.

The discretionary items in your spending plan are those more easily reduced or eliminated in the short-term. This list may include items like travel, eating out, purchasing new clothes, and similar extraneous purchases. Again, you get the picture.

Waiting until an emergency arises—like after you’ve lost your job—to scramble and figure out a reduced spending plan can be stressful, depressing, and the cause for family arguments. A little bit of preparation can go a long way. 

Being able to tweak your spending plan so that some pressure is relieved in a stressful time will give you a sense of being in charge—because you are.

In recalculating your spending plan post job loss, don’t forget to consider your health insurance.  If your health insurance is currently covered by your former employer, then by law, they must allow you to continue in their group plan for a period of time.  However, you will be required to pay the full premium. Have that COBRA payment figure in your mind when planning for a potential job loss spending plan.

Student Loans

Previously, I wrote an article on financial concerns related to education, and one topic I covered was student loan debt.

It is simply a fact of life for millions of people.

Something that you should avoid at all costs is missing payments or defaulting on your student loans.  It can be devastating to your credit rating and can be very expensive as penalties are added to the loan amounts (due to late payment).

If you lose a job, then you MUST contact your student loan lender(s) and work out a forbearance.  It is critical.

They will work with you, but you MUST initiate the process.

Supplementing Your Income in the Interim

If you lose your job, your goal is probably to get another one—and as quickly as possible.

Maybe you’d prefer to stay in the same field; maybe not.

If you plan on retooling yourself for a new career, which might mean additional downtime between jobs due to training or education, then you will need some alternate source of income in the interim.

Or perhaps you’re remaining in the same field, but current market conditions mean it will take a while to find a new position.

Whatever the reason, the point remains the same:  you need money now.

You may know that we currently live in what is widely referred to as the “gig economy;” it was the topic of a previous article in this series, in fact.  People wind up in the gig economy or doing freelance work for a variety of reasons, one of which may be that a main job was lost.

The opportunities in the gig economy are so numerous and diverse that it’s pointless to try and list them here; there are plenty of articles, websites, and books out there that offer extensive information on the various freelance industries. I won’t attempt to address that here. 

You know your skills better than anyone else and you know how much time you can devote to building a supplemental source of income—whether you go with a popular side hustle like Uber or try to establish yourself as a virtual employee.

(Just search popular employment websites like Indeed for “work from home” positions, or peruse prominent site Rat Race Rebellion to discover the wide variety of remote work available.)

If you’ve lost a job, it’s not like you need one more hassle, but there’s one thing to keep in mind if you do start freelancing: that income is TAXABLE. Also, the company or individual paying you generally does not withhold tax on what you earn.

We’ve seen over and over through the years that clients who take on freelance work are almost always unprepared for just how expensive it is from a tax standpoint: this is because you have to pay not only regular income tax on your earnings, but also self-employment tax.

If you find yourself in this position, it’s wise to consult with a tax advisor sooner rather than later. Even if you consider your freelance work to be just a temporary supplement so that you avoid completely depleting your emergency fund.

Also, you never know: You might discover that you love doing that type of work and continue to develop your side gig into a full-time career that gives you a sense of security moving forward.

Retirement Plans

If you participated in your former employer’s retirement plan, you should consider moving your vested funds from the employer’s plan to your own self-directed Individual Retirement Account (IRA).

Or, if you think you may quickly find another job, you might want to consider moving the funds from your previous company’s retirement plan to your new company’s retirement plan.

Not a fan of studying investments and choosing among thousands of options? Then it’s probably a good idea to keep your funds in your company’s retirement plan—they’ve already sifted through all those options and limited the available choices for you, making it far easier to make decisions. Just don’t forget the funds are there!

Health Insurance & Other Insurances

I mentioned it earlier, but it’s worth repeating:  If you have your health insurance through your employer and your employment terminates, so does your health insurance unless you elect to continue coverage through a “continuation plan” or through COBRA.

(For the record, COBRA stands for “Consolidated Omnibus Budget Reconciliation Act.” Your take away from that should be that Congress mandates you be allowed to continue your health insurance that you had with your employer for up to 18 months.)

Neither option may be the right long-term solution for you, but in the immediate aftermath of losing a job, you want to make sure there’s no lapse in your coverage.  Keep yourself and your family protected.

There is a clock ticking in regards to COBRA:

1. Your employer has 14 days to provide you with relevant information about how you sign up for COBRA coverage.
2. You have 60 days to make a decision.

Other insurance you may need to address after losing a job would typically be something like disability insurance.  I’ve mentioned disability insurance in several previous When Life Happens. It’s often an overlooked insurance type, even though it can be the most important insurance for relatively young folks. Statistically, young people are more likely to become disabled than to die early.

If you have disability insurance with your former employer, make sure you know your options for continuing your disability policy.

Having a great established relationship with a trusted financial advisor when facing the loss of a job can be a real boon in helping you sort through your options and make it through a trying time. If we can ever be of assistance, give us a call at 214-761-8304.