How can you get through this difficult time without losing your shirt? Follow these ideas.
Take cover under a rainy-day fund
There's no better antidote to financial hardship than having an emergency fund, Swanger says. It can prevent you from taking on debt, and buy you some time to explore job offers.
Unfortunately, only 40% of Americans have savings they can rely on in an emergency, according to the financial website Bankrate Opens in a new window. Shoot for an emergency fund of three to six months of expenses, says Swanger.
To build up your rainy-day fund now so you can be prepared for a possible job loss, start an automatic deposit plan at your bank and consider devoting any bonuses or tax refunds to the account until you have enough of a cash cushion.
Get what's yours
Don't forget to inquire about how to cash out any unused sick days, vacation time and possibly severance from your employer.
In addition, start the application process for unemployment benefits right away. It may take a few weeks before your benefit payments start rolling in. Understand everything that will be required of you in order to receive benefits, such as meetings with career counselors and documentation of your job search efforts.
Cut back on expenses
When the cash spigot dries up, belt tightening is a must. You may even want to rethink closing on a home if you are in the middle of that process when you lose a job—even if it's just days away, says Swanger. This may seem to be a drastic move, but it may be better than going through with the home purchase.
“If you miss a few months [of mortgage payments], you could be looking at foreclosure, and that will damage your credit for a long time,” Swanger cautions.
You might lose your deposit in this situation. However, says Swanger, “it's a small loss compared to a potentially huge loss later on.”
But there are some expenses that shouldn't be on your chopping block, such as health insurance. Though it's expensive, a major illness or accident could plummet you into an even bigger financial hole if you're uninsured.
You will probably have the option of continuing your employer's health insurance plan through COBRA, or you can buy individual coverage through one of the Obamacare exchanges.
If you have a baby on the way, it's doubly important to maintain coverage. With less income, you may qualify for subsidies to help you pay your premiums. And look into your state's health insurance program for children.
Tackle student loans
If you have student loans, work with your lender on an alternative payment plan so your loans don't end up in default.
Deferments allow you to put your federal loans on hold for a period of time. It's a better option than forbearance because interest won't accrue and your loan balance won't grow. Private lenders may also point to people who deal with financial hardship and can help you explore other payment options.
Identify sources of money
If your unemployment lasts longer than expected, you might need to tap retirement accounts to make ends meet.
Though it's not ideal, using after-tax retirement savings (Roth or non-Roth) is a better solution than taking money from pre-tax sources. After-tax sources allow you to take penalty-free and tax-free withdrawals of your principal, even if you are younger than 59 ½. To protect the tax-advantaged savings in your Roth, consider taking from the after-tax (non-Roth) source in your retirement plan. If you need to take an early distribution from your retirement plan, diversifying your savings into different contribution types may be your best bet.
If you have a permanent life insurance policy with a cash value account, consider borrowing against it or taking a withdrawal. Outstanding loans and withdrawals will reduce policy cash values and the death benefit and may have tax consequences.
Lean on family
If you're truly down on your luck, consider asking your family for money, but reframe the request as a loan, Swanger advises.
“It's a win-win,” she says. “In this low-interest-rate environment, an intra-family loan can help your family earn a little bit higher interest rate than at a bank.”
It works like this: Family members can make you a loan you will pay back over time with interest. In order for this money to be considered a loan, rather than a gift (which is subject to gift tax when the amount is above $15,000 (2018 gift tax annual exclusion, indexed for inflation)), it must be repaid with interest. The IRS sets minimum interest rates called the Applicable Federal Rate PDF Opens in a new window, which currently range from 1.52% for short-term loans to 2.64% for long-term loans.
“Work with a CPA or an attorney to set up the terms of the loan and spell out how the money will be paid back,” Swanger adds.