How to Manage Money When You're Between Jobs
Though the U.S. economy has been gradually improving, job changes -- both involuntary and voluntary -- are still a fact of American working life.
"It's also a fact that bills need to be paid whether you're employed or not," says J.J. Montanaro, a CERTIFIED FINANCIAL PLANNER™ practitioner with USAA.
To help you cover expenses and protect your finances as you transition from one job to the next, Montanaro offers these seven tips.
1. Decide how to collect your final pay.
If leaving your job wasn't your idea, your employer may provide a severance package to ease the financial pain. Amounts vary, but one or two weeks of salary for each year you've worked at the company is typical. If you're given a choice of a lump sum or a stream of payments, consider three factors:
- Benefits. If employee benefits (health care, life insurance, long-term care) continue as long as you're receiving payments, you may want to take the option that prolongs them.
- Your financial discipline. Afraid you might squander a lump sum? If your severance payment provides enough cash to justify dividing it up, choosing periodic payments will help keep you in paycheck mode.
- Your employer's stability. If your company is on thin financial ice, take the money.
- Tax considerations. Depending on the specifics of the severance package, executives and key employees may want to consider impacts to taxable income across tax years. Higher compensated individuals may save tax dollars by choosing periodic payments vs. a lump sum payout.
2. File for unemployment benefits.
If your employer let you go -- provided you weren't fired for misconduct -- you'll probably qualify for unemployment benefits. If you quit, usually you can collect benefits only if you left for "good cause," which generally means there was a problem at work or personal situation so difficult that you had no alternative.
If you think you're eligible, don't procrastinate. It may take two to three weeks to process your claim, so contact your state's unemployment office immediately. While each state's program varies, you can generally count on benefits to last 26 weeks, with federally funded emergency unemployment benefits extending up to 73 weeks in some states. Benefits are based on your income and how long you were employed.
If you separated from the military under honorable conditions, you may be able to claim unemployment benefits through your state of residency. Check with your state department of labor to get the lowdown.
3. Reduce your spending.
If your decision to leave was involuntary and your next employment is an unknown, it's important to preserve your cash while you're out of work; this can require a top-to-bottom examination of where your money goes. "This exercise can help keep you afloat today and be an engine for paying off debt and saving once the paychecks start again," says Montanaro. Cutting your expenses means nothing is sacred:
- Big ticket purchases. Put them off, period. If the purchase still makes sense later, do it once the financial pressure has lifted.
- Discretionary expenses. Eating out, entertainment, cable television and other such activities are enjoyable -- but not necessary. That makes them easy pickings for cutting back or cutting out altogether.
- Variable necessities. Groceries, gas and utilities are examples of things you need. However, they also offer you an opportunity to shrink your spending. Carpooling, couponing and adjusting your clothing -- not your heater or air conditioner -- when you feel too hot or cold are examples of trimming your variable necessities.
- Fixed necessities. The expenses associated with these are fixed and recurring -- that monthly car payment or mortgage, for example. Selling your car or moving to less expensive housing could mean a big change in your lifestyle, but it also may help you save a significant amount of cash.
4. Strengthen your emergency fund.
Use your severance pay, unemployment benefits and any money you can save to build a cash stockpile. Keep enough money in a savings account to pay at least three to six months' expenses. Highly compensated executives potentially need from 12 to 18 months in an emergency fund as they search for the right position. For a higher interest rate on the rest of your cash, build a short CD ladder or open a variable rate CD. Be careful, however, not to lock away money that you'll need. Most CDs require you to leave your cash for at least three months. If you served in the military and made tax-free contributions to the Thrift Savings Plan, you may be able to tap that money without the taxes and penalties associated with most retirement money.
5. Avoid cleaning your financial slate.
While you may be tempted to use your severance or other assets to pay off your car, credit cards or other debt, you may be better off making only the required or minimal payments. This strategy can stretch your cash and help you meet living expenses in case a new job isn't right around the corner.
6. Review your health insurance options.
At most companies, federal law allows you to keep your employer-provided health insurance for up to 18 months. Prepare for sticker shock: Continuing your benefits under the Consolidated Omnibus Budget Reconciliation Act can be pricey. You will be responsible for the entire premium -- what you paid, plus any amount your employer paid. But act quickly, you'll have only 60 days after your last day of employment to decide whether to continue your group coverage through COBRA instead of purchasing coverage on your own. Be sure to follow up with your employer's benefits department if you don't receive a COBRA notice soon after you leave.
Military retirees have medical benefits under TRICARE, but if you've separated from active duty rather than retiring, there's a COBRA equivalent: the Continued Health Care Benefit Program, which offers coverage for 18 to 36 months after the end of your TRICARE eligibility.
Whether you're transitioning from a military or civilian job, it pays to do your homework: You may be able to find a less expensive private health insurance policy on your own.
7. Protect your retirement.
If you have a 401(k) or other employer retirement plan, avoid the temptation to cash it out when you leave. In addition to jeopardizing your security when you retire, you could pay a steep price in the form of income taxes and penalties. Instead, roll the money over to an IRA, or leave it in the employer plan. Only tap your nest egg as a last resort. "Seeing taxes and penalties eat up a large portion of what you've worked hard to save adds insult to injury," says Montanaro.
If you leave your job with a 401(k) loan, you generally have 60 days after your last day to pay the balance to avoid taxes and penalties on the unpaid amount. Before you pay back the loan, consult with a CERTIFIED FINANCIAL PLANNER™ practitioner or accountant to determine what makes sense in the context of your overall financial situation.
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