What Happens to Your Finances When You Lose a Job Unexpectedly — and How to Prepare

Job insecurity has become an unfortunate reality for many Americans. Recent waves of layoffs have affected hundreds of thousands of workers across industries, while persistent inflation and record-high household debt continue to put pressure on family finances. Whether you have been unexpectedly laid off or are concerned about your future, here are some tips to help you navigate this challenging time.

What To Do When You’re Laid Off

When you receive the dreaded news, your company may offer a severance package. Review the agreement carefully before signing and consult with an attorney if you have concerns. If you’re a high performer or have seniority, you can possibly negotiate the timing of the severance payment, continuation of employer-paid health insurance or other benefits, and vesting (or expiration dates) of equity compensation. Then, follow these steps:

• Apply for unemployment: Processing times can vary, especially during mass layoffs, so filing with your state unemployment office promptly after your last day of employment is important. Unemployment benefits are taxable, and side hustles or other earned income can reduce your payments.
• Adjust your budget: Review expenses to determine how long the severance payment and your emergency fund will last. Don’t forget non-monthly expenses such as insurance or property taxes. Reduce unnecessary recurring and discretionary expenses. If you’re living off savings, transfer a set amount from your savings account to your checking account once or twice a month. Contact creditors if you’re unable to pay.
• Review your employee benefits: COBRA allows you to continue health insurance coverage for up to 18 months. You’re typically responsible for the full premium (both the employee and employer portions). You can also shop for a health care plan on the state and federal health exchanges and possibly qualify for an income-based subsidy. If you have company life insurance and health issues prevent you from affordable standalone coverage, consider keeping your existing group life insurance.
• Review your equity compensation: Your agreement outlines terms of any stock-based pay, such as restricted stock units (RSUs) or stock options. Unless your severance package indicates otherwise, you lose any unvested RSUs after your termination date. For stock options, review your agreement carefully to determine how long you have after termination to exercise them before they expire.
• Decide on your 401(k): Although it can be tempting, don’t make quick decisions or cash out your retirement. In many cases, you can leave your money in your former employer’s plan, although distribution requirements for smaller balances depend on the plan’s rules. If you have an outstanding 401(k) loan, the balance is generally due in full. If not repaid by the deadline, the outstanding amount is treated as taxable income and may incur a 10% early withdrawal penalty if you’re under age 59½. Consider the pros and cons of rolling money into an IRA. A CERTIFIED FINANCIAL PLANNER® professional can help you decide what option is best.

Preparing for a Potential Layoff

If you’re worried about potential layoffs or just want to make sure you’re building a solid foundation, focus on what you can control now.

• Continue building an emergency fund: While a six-month emergency fund is a good benchmark, consider increasing your emergency fund to 12 months’ worth of expenses if you’re single, a business owner, breadwinner or at risk of being laid off. Use unexpected income, such as a bonus or tax refund, to build your savings, and keep the money in a high yield savings account.
• Control expenses: Reduce unnecessary purchases and consider holding off on large ones. Unsubscribing to promotional emails and taking steps to reduce social media ads can reduce the temptation for impulse purchases.
• Maintain a diversified portfolio: Economic uncertainty and nonstop headlines can lead to panic or a desire to make drastic investment changes. Remember that a diversified portfolio can help steady the ride and increase your willingness to stay invested.

In unpredictable times, you can avoid feeling overwhelmed or making financial moves based on emotion alone by partnering with a CERTIFIED FINANCIAL PLANNER® professional. In an ideal scenario, workers would have foresight into their layoff and prepare financially. Realistically, many are blindsided by job loss. Whether you’re facing the anticipation of or the aftermath of a layoff, a financial expert can walk you through scenarios, help you meet your short-term and long-term goals, and safeguard you and your family.