Most people like to avoid thinking about the possibility of losing their job, but it is important to be prepared. Although statistics do show that the job market has improved in the majority of states over the past couple of years, the unemployment rate is still way above where it was at a decade ago. In order to properly prepare for a potential job loss, it is vital to have a full understanding of your current financial situation.
A Three Month Savings Plan
Everyone who relies on a regular paycheck to make ends meet should have a three month emergency plan. Not only will this be helpful in the event of a job loss, it will also be helpful for any other emergency situation, such as an unplanned surgery. Your three month plan needs to include a breakdown of your regular monthly bills along with a listing of the average amount that you spend per month on groceries, gasoline, and other essentials.
Once your monthly minimum budget has been determined, you need to multiply it by three. That total amount is the minimum amount of money that you should strive to have available in a savings account at any given moment. Although it may take more than three months to find new employment, the three month plan will take the pressure off of you at the outset, leaving you free to focus on going to job interviews.
The best way to save up for the three month plan is to place 10 percent of your income into a savings account each time you get paid. If you are unable to part with that much money, make sure that you place as much as possible from each check into your savings account.
Unemployment Benefits
If you have been laid off, you might be eligible for unemployment benefits. Each state has different guidelines for how much money will be paid out weekly, however, and it is almost always going to be much less than what you received in your paycheck. The average weekly benefit amount in the United States is $293, but depending on which state you live in you might receive anywhere from $230 to $628 per week.
Using the average figure of $293, you would receive only $1,172 a month before your taxes are withheld—not enough money for most people to live on. Ideally, you will have a savings account with enough money in it to cover your expenses for three months, and you will therefore put all of your unemployment payments into your savings account. In the event that your unemployment lasts longer than three months, the benefit money that you have saved will allow you to continue your job search without the added anxiety unpaid bills.
Investment Funds & Your 401K
Putting money into an investment fund is a very wise decision, especially in today’s economy. The money will be there when you retire if you are able to make it that far without being laid off, but if you find yourself in a financial pinch, you can also use your investment account as a source of temporary income.
Your 401K is another form of an investment fund. It is a good option for those who are laid off, although you will have to pay a penalty and taxes if you cash your 401K in early. If you are nearing the end of your savings account and unemployment benefits, though, cashing in your 401K early might be the perfect way to keep yourself from getting buried by unpaid bills.
Unemployment is Temporary
If you take the time to plan in advance, you should be able to make it through your period of unemployment without ruining your credit. You might have to temporarily get rid of nonessential items like cable television or hi-speed internet, but you can reevaluate your budget after you find a new job.
Derek Bristel was a Sargent Major in the U.S Army before pursuing a career in the private sector. He has been laid off three times since leaving the military.
Image courtesy: FreeDigitalPhotos.net
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