With all the changes in the world over the last several years, including an increase in layoffs as large companies look to rein in expenses, it is an important time for those of us still in our working years to review our financial situation in the event of a job loss or change.
This year, economic data has shown increased jobless claims, decreased job openings and slower wage growth. Even if you have a job and feel secure and comfortable right now, taking some time to review your personal balance sheet and do a temperature check is good financial housekeeping.
Here are some important items you can review now and regularly in the future.
Take Stock of Your Savings and Sources of Liquidity
I normally recommend having some cash savings set aside for my clients as an emergency fund. The amount you need may vary from case to case and can vary from three months’ worth of expenses to 12. If you are at the low end of that and don’t have any outstanding debt to pay down, you may want to consider moving that target from three to six months as an extra cushion, for example.
With high-yield cash savings rates being much higher than a year ago, you can earn a decent return on cash in the bank. It’s not uncommon to find APY rates over 5% at competitive bank deposit programs that are also fully FDIC insured, like MaxMyInterest.
If you have investments in stocks or similar securities in a brokerage account, those can also be tapped if cash is needed suddenly, but remember that they could be subject to price swings if the market is more volatile than usual in the near future.
Focus on Debt Paydown
If you are carrying any long-term credit card debt or other loans and may be unable to make payments if your employment is unexpectedly impacted, then now is the time to determine if you can address the debt faster. Typically, credit card debt charges have significant interest rates (between 15% and 25%) and can be hard to escape if you are only able to make minimum payments.
If you have not done so already, start a spreadsheet of all your current debt by bank and note the interest rate on each. A good strategy is to allocate extra debt payments to the balances that have with the highest interest rates, since those are accruing interest at the highest rates.
In some circumstances, you may be able to get temporary relief from debt payments, such as mortgage, student loan or auto loan payments, with a job loss. You can research with your current lenders their specific policies.
In the case of auto loans, the servicing company may have options to delay payments for a period of time, such as three to four months. Your mortgage company may have assistance programs in place, or you may qualify for deferment under certain federal policies (for example, loans guaranteed by FHA or Veterans Affairs). Likewise, student loan payment forbearance may be available, but you may still be accruing interest on loan balances.
In rarer circumstances, some people have taken loans against their workplace 401(k) accounts. One important thing to be aware of with 401(k) loans is that if you unexpectedly leave employment, the balance of that loan becomes due by the date you file your next tax return. If you are unable to repay it within that period, it is considered a taxable distribution, so you will still have tax liability owed on the amount not repaid (and possibly early-withdrawal penalties if you’re under age 59½). At the very least, you will want to be aware of this so it does not take you by surprise.
Do You Have a Budget?
If you have not done any budgeting in the past, consider this a good excuse to spend some time documenting your monthly expenses. While you’re at it, make note of which expenses are essential to your household and which are discretionary.
These days, with the proliferation of subscription services, you may be surprised at how much you’re spending each month without realizing it (Netflix, Spotify, any phone apps and other recurring fees can really add up). Fortunately, many of these services can be discontinued and don’t require a long-term contract if you suddenly need to cut expenditures.
Things like your utilities fall into the essential bucket and will make up the core of your required spending. Keep in mind that some expenses are variable. For example, fuel or transportation costs may drop if you’re out of work temporarily.
Review and Understand Your Employer Benefits
It’s important to fully understand your workplace health care benefits and what happens if you suddenly are no longer employed. You may be eligible to continue your health care coverage at termination temporarily through COBRA, but you will be required to cover the full cost of the monthly premiums. If your employer subsidizes or currently covers these costs, you may be surprised by how high they are when you’re 100% responsible. If you happen to know that number, it would be an important item to include in your budget.
If COBRA coverage is prohibitively expensive, another alternative may be to shop for policies through your state’s health insurance exchange, if available. Since the passage of the Affordable Care Act, some states have introduced their own state-specific health insurance marketplaces. If you happen to be in a state with a competitive marketplace, you may find options that are more cost competitive than COBRA with different coverage features. You may be willing to trade a lower monthly premium for a plan with higher deductibles or co-pays. If you happen to reside somewhere with few state options, your best option may differ.
Similarly, you should research with your employer if other benefits they provide, such as life insurance, disability insurance, etc., are portable. If you have savings in your workplace retirement plan, you may be able to leave assets in the plan after termination if you wish, or you may want to do a tax-free rollover to an IRA at another institution of your choice. Hopefully, you will not need to consider drawing on your retirement savings for living expenses, and that should be considered a last resort as that could hurt your retirement readiness down the road.
Review Your Résumé and Professional Connections
This probably seems like a no-brainer, but it never hurts to review your résumé and make sure it’s up to date and ready to send out should you need to start submitting job applications. While you’re at it, reconnect with peers whom you may want to act as references for you.
With other big businesses beginning or continuing to lay off staff, you want to be ready with any advantages you have in a competitive job situation where a solid track record or professional reference could tilt the scales in your favor.
With luck, you won’t need to experience job loss and the stress of finding another job, but being prepared and having a plan in place should provide you with a little extra peace of mind when thinking about the uncertain future ahead.
Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser located in Long Beach, California. Registration does not imply a certain level of skill or training. Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice. It should not be construed as a solicitation to offer personal securities transactions or provide personalized investment advice. The information provided does not constitute any legal, tax or accounting advice. We recommend that you seek the advice of a qualified attorney and accountant.
