In these tough economic times you may find yourself in a situation you did not contemplate; without employment. It is not a time to panic but a time to strategize. Decisions that you make in the wake of a job layoff can have a long-term financial impact. Although the circumstances of your layoff can present many financial challenges, a radical restructuring of your financial priorities may not be necessary. What may be necessary is to review and address your priorities in a methodical way.
Step 1: Assess your income
Include severance, unemployment insurance, spouse’s salary, rental income, investment income, Social Security payments, pensions, child support payments, and any other regular predictable income.
Step 2: Create a list of expenses
Start with your essentials and then move onto those expenses over which you have the most discretion. Credit card bills and bank statements can help determine and track spending patterns.
Step 3: Separate essential from nonessential expenses
Use a highlighter and quickly separate your list into items you consider essential and those you consider nonessential. Take a serious look at nonessential items to see where you can make cuts. The goal is to get a realistic idea of how you can get expenses in line with your income.
Step 4: Create a list of assets
Create a list of all assets, including liquid and illiquid assets to get a comprehensive picture of your current situation.
Step 5: Identify assets that could bridge the gap between income and expenses
There are general principles to consider and keep in mind when “spending” long-term assets. Use your emergency fund first. If you have set aside money, then now may be the time to use it. Next, spend any investments that have already been taxed. Contributions to a Roth IRA can be withdrawn without tax implications, but there are taxes and possibly penalties with traditional IRAs. Consider your retirement accounts (401k, traditional IRAs) as your last option. If you take a withdrawal from your retirement accounts, it may be costly; you may be subject to a withholding of 20% and you may owe a 10% early withdrawal penalty.
KEY POINTS TO CONSIDER
- Although you may need to postpone saving for retirement, it is important to resume some minimum level of saving as soon as you are able.
- Hold off on the temptation to start repaying long-term debt. While this is an admirable goal, after a layoff you need to respect your day-to-day priorities.
- Remember, one of the best places to turn for help in developing a recovery plan is your financial advisor. Your financial advisor may be your best resource for helping you decide in which order to “spend” your assets.