Managing your money is probably the hardest part of employment changes and in particular when unemployed. The four most important steps to managing your money if unemployed are applying for unemployment insurance, obtaining medical insurance coverage, managing any retirement savings and getting a handle on your spending and expenses. The key steps and resources to help with all of this are contained in this section.
Unemployment Benefits:
Many people who lose their job qualify for unemployment benefits supplied by the federal government and administered by individual states. Applications may be submitted online or in person. To learn about unemployment insurance, Workplace Fairness provides an overview. It is important to apply quickly since paperwork and processing may take some time. The number of weeks you are eligible to receive an unemployment check varies by state, as does the amount you are able to collect. Many states allow collection for up to 26 weeks; however, Congress has extended benefit limits because of record-high unemployment levels. In states with particularly severe job loss benefits may be available for up to 73 weeks in total, although that is becoming increasingly rare in 2014. Depending upon the circumstances, some applicants are denied unemployment insurance, but it is possible to appeal.
Health Benefits:
Maintaining health insurance coverage is among the most important things to do once unemployed. Explore your options with plans that may cover your spouse or partner. (This may be the most cost-effective avenue.) Another option is COBRA, a government-mandated program that extends your current medical insurance for 18 months if your company employs 20 or more people. Investigating COBRA insurance is a must in the period immediately following the loss of a job. Your former employer’s human resources department should provide you with information about COBRA. If not, ask them for it. Be aware that you will be responsible for the monthly premium payments to maintain health coverage through COBRA. Between 2009 and 2011 the government subsidized COBRA payments for a specific length of time, but that initiative ended in September 2011. Now you are responsible for the full payment.
Unfortunately, many people have difficulty affording COBRA once unemployed. The Foundation for Health Coverage Education is a non-profit organization established to help people identify their free or low-cost healthcare options.
Another option is to shop for health insurance online. This can be a cost-effective strategy since COBRA premiums include the cost of your health insurance plus a fee for administrative costs.
Finally, the Affordable Care Act went into effect on January 1, 2014. This will impact the cost of health insurance for those who are unemployed, self-employed or whose employers do not provide insurance. To learn more about your options, you can read more here. Open enrollment began October 1, 2013 and is found here.
Retirement Benefits:
When facing separation from your employer, there are many things you might not know you have to do. One such task is managing the transition of retirement assets.
If you’ve been laid off, are leaving your current employer for a new opportunity or are even retiring, your first conversation should be with your former employer’s department of human resources. While many large firms provide former employees with an informational packet during their exit interview, you will likely still have questions. Guidance you receive from HR could prove invaluable in managing this transition.
The most common type of company-sponsored retirement vehicle is the 401(k). Initially, you should determine if your account is fully vested, and what percentage of employer contributions you’re entitled to retain. Usually, if you’ve worked for your employer for an extended period of time, you’re fully vested and able to direct the entire balance in accordance with your needs.
When you separate from your current employer, you have three options: maintain your current account, convert your account or cash out.
Maintaining: While maintaining the same account is seemingly the simplest solution, it often is more difficult in the long run. Not only will your former employer likely charge you maintenance fees, but you also won’t be able to borrow against the principal.
Converting: To avoid taxes, penalties and fees, many former employees roll their 401(k) balance into their new employer’s plan. However, if you don’t find another job right away or your new employer doesn’t sponsor a plan, you can convert your capital into an IRA – another reduced tax retirement vehicle that isn’t tied to an employer.
Cashing out: If you feel that added financial flexibility is essential, cashing out you’re 401(k) may be the best choice to suit your needs. However, if you choose to cash out, your former employer is legally required to withhold 20% of the balance and transfer it to the IRS if you don’t convert your old 401(k) to a qualifying account within 60 days.
Make sure to weigh the pros and the cons before making your final decision – and if you’re still unsure, consulting a financial planner would be a prudent choice. Try not to cash in these tax-deferred retirement plans to pay living expenses while you are unemployed, as job loss is usually temporary while retirement can last decades. If you must tap into this money as a last resort, repay it within 60 days to avoid income taxes and the 10 percent penalty on early withdrawals before the age of 59 1/2.
Budget:
It’s natural to worry about your short-term financial future when losing one – or sometimes even two – sources of income.
However unpleasant, making changes to household spending patterns doesn’t need to be time-consuming or expensive, as there are many efficient and cost-free resources available. One such tool is Mint. Mint is a powerful budgeting tool available to iOS, Android and Windows users. The app allows the user to set up a monthly budget and track expenses by category. Using a tool such as Mint allows the user to track spending habits and more easily determine what practical changes need to be made.
While making calculated reductions in spending is important after a layoff, it isn’t the only factor in maintaining a healthful cash flow. As part of the budgeting process, it is often prudent to contact banks and financial institutions to determine what preemptive measures can be taken. For example, many creditors offer generous terms for the unemployed – especially when the account isn’t yet past due. The unemployed may also qualify for a special mortgage assistance program offered by the federal government called forbearance. Under this program, lenders may stop foreclosure proceedings and suspend all or a portion of mortgage payments for several months.
Another preemptive tactic for managing your money is to start a rainy-day fund in preparation for sudden life changes – like periods of unemployment. Instead of buying a morning latte, with as little as $4 a day, you could save nearly $1,500 dollars a year. While not a small fortune, such a sum will appear to be a financial windfall when faced with a pink slip or repair bill.
Even though a layoff and the subsequent job search process will often cause financial hardship, some of the stress can be avoided by making thoughtful changes in spending as soon as possible.