Sudden job loss or an unexpected job change is often difficult—on your emotions and finances. Many people feel overwhelmed, and the stress of knowing that bills don’t stop coming adds to that. Monthly bills, discretionary spending and current debt are just a few items that require attention.
It's important to understand that decisions made during this period can impact long-term financial health. Knowing what to consider when you get laid off may help avoid costly mistakes. And can help you handle this transition without sacrificing your long-term plan.
Here are eight common mistakes people can make when laid off or changing jobs, and what to consider instead.
1. Acting on Emotions
It may be tempting to make immediate decisions while emotions are high. That’s thanks to our human tendency toward present bias and action bias. These two forms of faulty thinking can pop up during stressful times.
Present Bias: Focusing on today at the expense of the future.
Action Bias: Feeling compelled to act, even if it may not lead to a better outcome.
Panicked or snap decisions can compound challenges, resulting in even higher stress and anxiety.
Carefully evaluate your situation and create a plan for responding to short-, intermediate- and long-term decisions. You may have spent years positively positioning your finances—don't risk destroying them in a fraction of that time.
2. Leaving Help on the Table
Take the time to review all of the details of your exit package before departing your employer. It can be well worth it. Some companies may offer optional career search assistance and training—valuable benefits that can assist when looking for a new job.
If the job change is for other reasons, such as a family move, you might consider negotiating severance or extended health benefits.
And if you're struggling to make ends meet or need additional support, check with your local government and nonprofit organizations to see if there are programs that can provide financial assistance or job training.
3. Ignoring Your Health
With so much change, it can be easy to ignore your health. However, sticking to or adopting a specific “health plan” can help restore a sense of calm. That routine practice may include exercise, balanced meals, keeping up with hobbies and regular doctor appointments. With money being a top stressor, paying attention to how it can impact health is essential.
You might negotiate your health care benefits extensions with your employer or look into COBRA. This federal program allows you to continue your employer-sponsored health insurance for a limited time, but it can be expensive. You may want to consider shopping for insurance on the marketplace or exploring other options like Medicaid or Medicare if you’re eligible.
4. Avoiding Job Hunting
While it's important to take some time to evaluate your situation and make a plan, you don't want to wait too long to start looking for a new job. Start by updating your resume and LinkedIn profile.
A reported 40% of Americans have been laid off or terminated from a job at least once.1 Your news will likely be met with empathy and offers to help. Reach out to your professional network for leads and recommendations. Consider attending job fairs and networking events to expand your reach.
5. Not Reining in Spending
Create an updated budget to evaluate your financial obligations and track your spending. While cutting expenses may seem painful initially, it's important to remember that these don't have to be permanent changes.
Making short-term changes in areas such as dining out and entertainment can have a big impact on reducing your monthly budget.
This process will help establish financial priorities and identify opportunities for reducing expenses. Some job changes—like working from home—may provide immediate opportunities for reductions in commuting and professional clothing expenses.
6. Tapping Your Retirement Funds
The lack of income after a layoff or job change makes it tempting to tap retirement plans for an immediate source of cash. This should be avoided for as long as possible, and instead find ways to keep your money invested if you can. You can lose a portion to federal and state taxes, and it may be subject to premature distribution penalties.
In addition to these upfront costs, you can lose the tax-deferral status of these investments—and the potential for future growth. For many investors, these funds are the staple of long-term financial goals. Using them during a layoff or unforeseen job change should be a last resort.
7. Draining Your Emergency Savings
Isn’t this the point of an emergency account? Yes. Keeping an emergency savings plan intact for unplanned expenses is valuable. But think twice before obtaining additional credit lines during a transitional period. It's crucial to manage your rainy day fund carefully.
Leverage the money-saving opportunities identified in your budgeting process to help meet some of your bills. You can also consider reducing extra payments on credit cards, student loans, car loans or mortgages. And, you may try to negotiate a pause on debt payments without penalty.
8. Not Checking on Your Risk Tolerance or Goals
When faced with a disruption in your income, it is essential to reevaluate the potential for risk in your investments; you may want a more predictable secondary source of assets. Increasing the allocation of a portion of your investments to more conservative positions may be warranted. But it depends on your situation.
Experiencing a layoff or an unforeseen job change is a highly stressful and challenging life event. Reduce financial stress and worry by conducting a thorough and honest review of your budget or talking with a trusted advisor to establish a checkpoint of where your finances are overall.
Understanding your financial picture will help strategically position you for today and tomorrow.
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This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.