How Can You Prepare for being Furloughed or Laid off?
By Mack Bekeza, CFP®
With multiple states beginning to “reopen” their economies, many are worried about the possibility of being furloughed or even laid off. So in times such as these, what can one do to prepare for something like this? Before we dive in, what is the difference between being furloughed and being laid off?
What does it mean to be furloughed?
A Furlough is essentially a temporary layoff, meaning that employees must cease working and are unpaid until further notice; however, employee benefits are typically not affected.
What does it mean to be laid off?
Your employer has decided they can no longer compensate you due to financial pressures and has to let you go. However, opposed to being flat out fired, employees may receive some sort of severance package, although that is not always the case!
Now we have that part out of the way, let’s get down to what you want to know.
What does your personal balance sheet look like?
What is a personal balance sheet you ask? Your personal balance sheet is essentially a list that details all of your assets and debts. Your balance sheet should also include a figure called your Net Worth, which is simply the total value of your assets minus your debts. Why is having a balance sheet crucial? There are numerous benefits of knowing what your personal balance sheet looks like, but for the sake of preparing for being furloughed or laid off, there are two key benefits of a personal balance sheet.
- You will have a great idea of how long your money will last if you were to stop earning income. You may discover you have more money than you think.
- Knowing exactly how much you owe is not only a stepping stone to prepare a debt pay off plan, it also will aid in budgeting. In other words, if you discovered you owe more money on your credit card(s) than you do for your car(s), you can start prioritizing your credit card debit versus paying down a car loan.
Do you have a written budget and actively track expenses?
It is crucial to have a written budget, no matter how good or bad times can be. In the instance of preparing to be furloughed or laid off, your budget will detail all of your current income and expenses. Writing a budget is a phenomenal opportunity to prioritize necessary expenses versus costs that well… we don’t need to incur but do anyway. Let’s face it, splurging on clothes and entertainment is fun.
If you are someone who spends exactly as much or more than you earn, please take this time to cut unnecessary expenses from your budget and use those dollars towards something more critical… like what I am going to talk about right now.
Do you have any rainy-day funds?
If you already have compiled your personal balance sheet and your budget, do you have funds (specifically 3-6 months’ worth of expenses) in place for an emergency, like getting furloughed or laid off? If you do not, I highly recommend that you build one ASAP. In the instance that you are furloughed or laid off, you will give yourself a big hug for having this setup!
How much of my income should I put towards an emergency fund?
15-20% of your income is a rule of thumb when it comes to how much you should sock away for saving and or investing. In the instance you do not have any savings, I recommend that you contribute as much as you possibly can towards this.
My favorite strategy for building emergency funds is getting $1,000-$5,000 saved up as quickly as possible then reduce your contributions to what you believe is a comfortable savings rate, which my recommendation is 15-20% of your income. But if you are actively contributing to your company’s retirement plan, IRAs, taxable accounts, or all of the above, simply incorporate putting some money towards your rainy day fund along with your investment contributions. For example, you can invest 10% of your income towards retirement and save the other 5-10% towards your rainy day fund until you met your savings goal, then go all-in on investing!
3-6 months of one’s expenses can be a pretty significant amount of money, so at the end of the day, do not feel like you have to starve yourself to get this built up. Similar to investing for retirement, it’s a marathon, not a sprint! Also, remember that because you have a substantial rainy day fund, it might not cover all of life’s emergencies. For instance, a major medical operation can cost significantly more than six months of one’s living expenses out of pocket. However, having money saved for emergencies versus not have anything saved at all is always better.
If you face the risk of not earning a paycheck from your current employer for more than 3-6 months, consider your emergency fund as a way of buying time to figure ways to earn more income!
What if I am already furloughed or laid off? Anything I can do help pay my bills?
To answer this, I am going to rapid-fire recommendations for you to keep afloat
- Prepare your personal balance sheet.
- Track all of your expenses and prepare a monthly budget.
- Cut out all non-essential expenses. Lowering your expenses can stretch your existing savings significantly!
- Be on the lookout for other employment or income opportunities.
- If the job market is dry for your industry or your skills/expertise, apply for unemployment benefits. For those who are wondering about furloughed employees and collecting unemployment, some states will allow furloughed employees to collect unemployment because the employee has been forced not to work and is therefore not earning income. However, please research how to qualify for your state’s unemployment program!
- Sell personal belongings that you do not need.
- Barter your services or belongings.
- Perhaps the most important tip, keep your head up! Life can be pretty challenging or even cruel, but don’t let a bad situation get the best of you.
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