If you’ve joined the fast-growing ranks of the unemployed, follow these steps to safeguard your finances.
1. Decide how to collect your final pay.
Employers often provide severance packages to ease the financial pain of job loss. Amounts vary, but one or two weeks of salary for each year you’ve worked at the company is typical. Executives may get more. If you’re given a choice of a lump sum or a stream of payments, consider three factors:
Benefits. If your employee benefits continue as long as you’re receiving payments, you may want to take the income option to prolong them.
Your financial discipline. Afraid you might squander a lump sum? Choosing periodic payments keeps you in “paycheck” mode.
Your employer’s stability. If your company is on thin financial ice, take the money and run.
2. File for unemployment benefits.
Provided you weren’t fired for misconduct, you’ll probably qualify for unemployment benefits. 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 some states offering an extra 13 weeks on top of that. Benefits are based on your income and how long you were employed.
3. Reduce your spending.
It’s important to preserve your money, but don’t get carried away. Rather than eliminating expenses altogether, you can save a lot of money by shrinking your costs. For example:
Squeeze your cable, phone and Internet providers. Downgrade to a cheaper package — and shop around. Your current carrier may offer a much better deal if you let them know you’re thinking of switching.
Make your fitness club sweat a little. Exercise can help ease the stress of unemployment. Rather than canceling your gym membership, let the club know you’ve lost your job and ask for a lower rate.
Lower your insurance premium. Tell your auto insurer you’re no longer commuting. This could lower your premium.
4. Strengthen your emergency fund.
Use your severance, unemployment benefits and cost savings to build your cash stockpile. Keep at least three to six months worth of expenses in a savings account. For higher interest on the rest of your cash, build a short CD ladder. Be careful not to lock away money that you need access to, though. Most CDs require that you leave your cash in for at least three months.
5. Review your health insurance options.
Federal law allows you to keep your health insurance for up to 18 months. Prepare for sticker shock: Continuing your benefits under COBRA (the Consolidated Omnibus Budget Reconciliation Act) can be pricey. To relieve some of that pain, the federal stimulus package provides a subsidy that may cover 65% of the cost for the first nine months. Typically, you’ll have 60 days to decide whether to continue your group coverage through COBRA or find a more competitive option on your own.
6. Save your retirement.
If you have a 401(k) or other employer retirement plan, avoid the temptation to cash out. “If you’re under 59½, you’ll face a 10% tax penalty on top of regular income taxes,” says Walbert. Instead, roll the money over to an IRA or leave it in your employer plan.