An old economics joke goes: “What is the difference between a depression and a recession? A recession is when my neighbor loses his job; a depression is when I lose mine; and a panic is when my wife loses hers.” Let’s hope we don’t get to the panic point, but an old joke contains an important truth: unemployment has very disparate impacts.
According to the Bureau of Labor Statistics unemployment hit 8.9% in April to 13.7million unemployed. The number of people experiencing unemployment for more than six months has continued to increase, growing to more than 3.7million in April. The Federal Reserve forecasting that the unemployment rate could hit 10% this year, the number of people unemployed for longer stretches of time is expected to increase as well.
The worse part is that as jobless rates go up, duration usually follows. More people are facing an extended period of unemployment and the potential financial difficulties that go along with it. Generally, you should put away up to six months of living expenses to carry you through a financial emergency or job loss. But with more job hunts lasting longer than half a year, backup funds can fade away fast. Here are some things to keep in mind, starting now:
While You’re Working
Double that emergency fund! Make only minimum payments on your credit cards. That contradicts the usual advice of paying off your credit cards, but if you are worrying about losing your job, these aren’t usual times. Put the remaining money in a money-market or high-interest savings account.
Consider downsizing your living quarters. If you are living in a house or large apartment, consider getting a roommate or moving into a smaller size and less expensive living quarters.
Cut down your expenses. Cut spending on nonessentials such as restaurants, alcohol and entertainment. Don’t spend to relieve anxiety. Being in control of your money is the most important thing.
Get another credit card or a home-equity line of credit. Since it’s easier to get one while you’re employed, do it as a precaution in case money becomes hard to access if you are unemployed. But use this credit only as a last resort.
When the Word Comes Down
File for unemployment benefits immediately. A severance package from your employer could delay your eligibility, but so many of the unemployment offices are overwhelmed right now and are behind.
Get a deferred-payment plan or any program to restructure any loans. Call your landlord or lender if your layoff results in immediate financial instability. Look into all your health-insurance options. The government made some modifications to the federal COBRA law, which allows people to extend their previous coverage, this isn’t always the most affordable plan.
Know your retirement funds rules. If you have a 401(k), 403(b), or 457(b), be sure any profit-sharing and matching has been credited to your account before leaving your employer. Immediately rollover your employer held pension accounts into IRA.
Monitor your investments. When the stock market is going down, it’s tempting to sell stocks out of fear or buy them out of greed. If you are long-term investor with a well-diversified portfolio and are comfortable with your allocation among stocks, bonds and short-term investments, there’s no reason to be making any big changes.
The First Six Months
Develop a tight budget, so your severance or emergency funds will last as long as possible.
Prioritize your debts. When the bills come, pay the necessary ones, before making minimum payments on your credit cards.
Further downsize your living quarters. If money starts getting tight, consider further downsizing your home or selling any nonessential cars, electronics, jewelry or other valuables.
Six Months and Beyond
De-invest. Start by looking for securities you might liquidate in nonretirement accounts. Potential tax write-offs might be available to you. If they’ve got a capital loss, they can write that off against any gains. Or they can write off up to $3,000 of a capital loss against any other income.
Then tap your Roth IRA. Money grows tax-free in these retirement accounts, and you can usually withdraw contributions with no tax liability. That should be one of your measures of last resort, because you want that money to remain in that tax shelter.
Don’t tap into your traditional IRA or 401(k) until the very last moment. Otherwise, you’ll need to pay taxes and penalties on those withdrawals. And you will lose compounding interest and yield.
