Losing your job is never easy, and it can create a stressful and uncertain time. However, making informed financial decisions can help you navigate this transition smoothly and avoid further difficulties. Life is a series of adjustments, and while job loss is a challenge, it can also be an opportunity for growth and new beginnings. Overcoming difficulties can be rewarding, and with the right approach, you can emerge stronger.

Key Financial Principles to Remember

• Maintain an Emergency Fund. It is important to have enough liquid cash to cover essential expenses in times of need. Conversely, most investors do not need $200,000 in cash. “Cash drag” refers to the negative impact of holding too much cash in an investment portfolio, reducing overall returns. Since cash typically earns lower returns compared with other investments, excessive cash holdings can slow portfolio growth, especially in a rising market.
• Make Decisions Based on Personal Circumstances, Not Market Trends. Your investment decisions should be guided by significant changes in your life, not market fluctuations or expectations. Job loss qualifies as a major life event requiring thoughtful financial planning; market “expectations” do not.

Some individuals find new jobs quickly, while others may take months. Below are critical steps to take if you find yourself unemployed.

Managing Expenses: What to Pay First After Losing Your Job

If your income is significantly reduced, it is crucial to adopt a triage approach to your bills. Determine what must be paid first and what can be deferred.

High Priority:

1. Housing: Rent or mortgage payments should come first.
2. Transportation: If you rely on a car for searching for a job or for work, keeping up with auto loan payments is important.
3. Utilities: Keeping the lights and water on is essential.
4. Child Support and Court-Ordered Payments: These obligations must be met to avoid legal consequences.

Lower Priority:

1. Credit Cards. Don’t let low-priority creditors pressure you into payments you can’t afford.
2. Medical Debt.
3. Student loans. These can often wait.
4. Retirement Savings.

Take Action ASAP

One of the most important things to remember if you lose your job is to take action immediately. Start by cutting out unnecessary expenses, such as subscription services or other products/services you could easily go without. You may also think about lowering your 401(k) contributions to just your employer match. This could help to free up some cash in the short term. Lastly, don’t forget to reach out to your lenders to see if they offer deferment or forbearance options. A lot of creditors have hardship programs that could help.

Avoid Panic and Rash Financial Decisions

Financial stress can lead to poor decision-making. Instead, take a step back and evaluate your situation calmly. Ideally, work on financial planning when you’re feeling fresh—often in the morning before daily stress accumulates.

Avoid Tapping into Retirement Accounts Prematurely

Many people rush to withdraw from their retirement savings, but this should be a last resort. Consider:

• Tax Penalties: Early withdrawals (before age 59½) often incur a 10% penalty plus income tax, significantly reducing the amount you receive.
• Long-Term Impact: Withdrawing funds means losing out on potential growth, making it harder to rebuild savings later.
• Market Timing Risks: If the markets are depressed, selling investments could lock in losses.

If you must withdraw money from a retirement account, check for penalty waivers for financial hardships, and explore repayment options to minimize long-term damage.

Review Your Severance Package

If your employer offers severance, take some time to review the details carefully. Consider how the payment is structured and whether or not it will be a lump sum or spread out over time. As for health insurance, will your employer continue coverage, and if so, for how long? Regarding life insurance, check to see if you can keep your group policy or convert it to an individual plan. Lastly, make sure you understand your 401(k) and stock options. Ask yourself: are you fully vested and what happens to any unvested options?

Remember, a change in how you receive income doesn’t change your tax obligations. Severance pay is subject to federal and state income taxes. A lump sum payout could push you into a higher tax bracket, while payments spread over time may help reduce the immediate tax impact. Severance agreements can be complex.  Consult a financial advisor to understand your options, minimize taxes, and make the most of your package.

Secure Health Insurance Coverage

Losing your employer-provided health insurance can be a big worry, but there are a few options to consider. Some packages include temporary health insurance. This can be one of the most important parts of the severance package.  If not, COBRA might be an option—if your employer had 20 or more employees, you could continue your current health plan for up to 18 months, though you’ll have to cover the full cost. If you’re married, you might also be able to get on your spouse’s employer-provided health plan, but you’ll need to act quickly since most plans require enrollment within 30 days of losing coverage. Finally, you can look into marketplace plans. These individual policies are available through public and private health insurance exchanges. The coverage in these plans is often state-specific. If you don’t qualify for a subsidy, these plans can be expensive. The coverage also can be limited. Sometimes, the only options are HMO-type plans with limited coverage, but they are better than nothing.

Evaluate Your 401(k) Options

Deciding what to do with your 401(k) after job loss is crucial. Consider:

• Leaving It with Your Employer: If you are 55 or older, withdrawals from a 401(k)—but not an IRA—may be penalty-free.
• Rolling It over to an IRA: This may provide more investment options and lower fees.
• Cash Withdrawal: This is generally a last resort because of taxes and penalties.

If you’re unsure, consult a financial advisor to determine the best course of action based on your age, financial needs, and future goals.

Apply for Unemployment Benefits

File for unemployment benefits immediately, as processing times can delay payments. Be aware that each state has different eligibility requirements and benefit amounts, resigning from your job may affect your eligibility, and some states offer additional programs beyond standard unemployment insurance. Check your state’s unemployment office for up-to-date information on benefits and assistance programs.

Network and Job Search

Building and leveraging your network can significantly increase your chances of finding a new job quickly. Job loss is not something to be embarrassed about. Be open and candid regarding your skills, experience, and expertise.

• Reach out to former colleagues, industry contacts, and professional associations.
• Ask your ex-employer to act as a reference.
• Update your resume and LinkedIn profile.
• Consider temporary or freelance work to generate income while searching for full-time employment.
• Consider a job seekers networking group.

Final Thoughts

Losing a job is a major life event, but with careful planning and proactive steps, you can minimize the financial impact and position yourself for a successful transition. Take control of your situation, focus on what you can do today, and remember—this is just one chapter in your journey. Stay positive, stay proactive, and trust that new opportunities lie ahead. As always, if you need assistance with your financial situation and want to work with a dedicated financial advisor who prioritizes your goals, please reach out to our team.

Good luck—you’ve got this!