A little security can help ease the sting of a job loss.
Just when everything is going along great, out goes the rug from under your best-laid plans. A job loss can be upsetting, or it can be financially devastating. It depends on how well you've prepared for that unexpected blow.
One thing you never want to face during unemployment is withdrawing money from your 401k, or anything else that's presumably growing until you retire. These often carry a hefty penalty for early withdrawal, and they put you behind on two fronts. You'll have less for retirement, plus you'll pay the fees. What you need are emergency funds.
Savings come in several forms, including retirement, smaller goal-oriented savings, large purchase savings, and emergency funds. Your emergency savings help you navigate around potential disaster if you're suddenly laid off.
At one time, 3 to 6 months set aside was the standard advice. That's no longer the case. Many financial experts now suggest 6 or even 9 months worth of living expenses are needed to offset the loss of income. That might seem like an enormous goal, but with longer average periods of unemployment, less than 6 months of savings might not be enough.
When calculating how much you'll need, don't plan for just your largest bills. You'll need enough to cover mortgage or rent and vehicle payments, but you'll also need to pay utilities, credit cards, insurance, and buy groceries. Everything that's in your normal budget should be considered. Estimate a bit higher than your average monthly expenses, and you'll have fewer worries about falling short.
Job security is a thing of the past. If NASA employees can lose their jobs, almost anyone can. Planning to save for emergencies later can put you in a serious predicament. Even if you can only save a small amount now, small is better than nothing.
Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling, tells Bankrate that saving $100 a month or 10% of your paycheck is a good way to get started toward your emergency fund goal. If you can set aside more than that, all the better.
A budget app lets you monitor savings.
Managing finances through a period of unemployment is challenging, even with emergency savings. Each time you withdraw money to pay expenses, your cushion gets smaller and smaller. Unemployment benefits help reduce your dependency on savings, but they are temporary. The amount you can receive varies by state, and it's usually a fraction of your normal paycheck.
If your job loss is long-term or permanent, your state may help you train for a different line of work. For example, Washington state offers a program called Worker Retraining, which pays tuition for training unemployed or dislocated workers who receive unemployment benefits. Information about programs in your state are available through the office where you draw benefits, such as the Department of Labor and Workforce Development.
Unemployment can happen to anyone at any time, and you won't always know in advance. Going from two incomes to one, or from one income to none, can create financial problems that remain long after you're employed again.
Prepare for that unexpected event by setting up an emergency savings account now. Even if you can only save a small fraction of your paycheck, it all adds up and might just save your credit in the long run.
Mint.com has financial software that helps you set up a budget and keep track of it at home or away. Sign up for your free account today, and watch your emergency savings grow.