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Where To Begin When Facing Unemployment

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The Tampa Tribune

Published: June 15, 2008

If you have lost your job or are facing a layoff, you need a plan for coping financially. This is especially true if you haven't been able to build an emergency fund or you've been living too high and have never considered there might be a disruption in your income.

Let's start with some tips for folks who are still employed but who know they won't have a job for long. Here's how to prepare for that pink slip:

Stash some cash. If you haven't built an adequate emergency fund, stop your retirement contributions. When faced with monthly bills and no paychecks, you need to stockpile as much cash as possible. If you were to contribute that extra cash to your 401(k) and later you needed it during a long unemployment stint, you could be looking at a 10 percent penalty plus income tax payments.

Adjust withholding. Lower the withholding on your remaining paychecks. Your taxable gross income is likely to be lower for the year even if you find a new job in a few months.

Credit-card cutback. Make the minimum payment on your credit card. Again, you need to begin saving as much cash as possible for essentials - the rent or mortgage, food and utilities. Once you are employed again and out of financial danger, return to aggressively paying down that debt.

Bare necessities. Review your budget (I hope you have one), and cut every expense that is not a necessity. Many folks facing a job loss don't move fast enough to cut expenses. Only after the paychecks stop do they panic and begin to cut.

If you eat out less and cut entertainment expenses, you could find $200 to $300 in your budget, which will at least help pay for (some) gas to look for another job.

Here are some things to consider if you've already lost your job:

Immediate action. I can't emphasize this enough: Cut expenses without delay.

Unemployment benefits. Apply for unemployment if you're eligible. Don't be too proud. Unemployment is an insurance fund that has been funded on your behalf by your employer.

Health insurance. If you can, maintain your health insurance. Employers are required by law to offer the option of continuing your health insurance up to 18 months through the health benefit provisions of COBRA (Consolidated Omnibus Budget Reconciliation Act of 1986). The problem for many people is they have to pay the full amount for the coverage plus an administrative charge. If you are married, see whether you can join your spouse's plan.

Although COBRA can be expensive, the alternative could be worse. Having a serious medical problem without health insurance could trigger significant financial difficulties. If your company plan is particularly expensive, you could reduce your premium by opting for higher out-of-pocket co-payments or deductibles. Also consider getting catastrophic coverage in case of a major illness.

Retirement withdrawals. Tap into retirement money only if things have become dire. By that I mean you are running out of food or you've exhausted every means to pay your mortgage or rent. You may be able to take a "hardship withdrawal" from your plan, if it's allowed by your former employer. A hardship withdrawal is not a loan. You can't put the money back into your portfolio later.

Also, the withdrawals are subject to taxes and a 10 percent penalty if you are not at least 591/2. Check with the plan provider to see whether it allows for hardship distributions and under what conditions.

If you have a Roth IRA, you can withdraw your original contributions without a penalty. If you have a traditional IRA, you may avoid the 10 percent penalty if the early withdrawals are used for certain qualified expenses.

Finally, if you're having trouble finding employment, be willing to take anything you can get with perhaps evening or weekend hours so you can leave your days open to look for a better job.

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