You’ve been given news that may come as a surprise or maybe it;s something you’ve had a feeling was about to happen for some time. In either event, you need to understand a few basic steps that should help minimize financial setbacks as you transition through this process. Here is a list of some of the items you should prioritize.
Take a deep breath!
An event like a layoff can be very unsettling and can cause you to think the worse about your financial future. It’s important to note that a layoff in almost every case has nothing to do with you personally. I’ve watched first hand many examples where someone in this position has been able to take this speed bump and turn it into an incredibly positive redirection in their life.
Understand your health insurance options
In the event you were the provider of health insurance for yourself and/or your family, you need to understand the steps required to continue coverage. It is federal law that your previous employer (as long as they employ at least 20 people) offers you a continuance of your current coverage. This is called COBRA. In most cases you will find an increase in premium cost because you will no longer have the employee subsidy. Even with that, this can be the best option at times. Another option to continue health insurance coverage is to go on the open market for individual/family plans direct from an insurance carrier. You will have abundant choices, but many find this very complicated as they are used to the menu offered by their previous employer. In this event, it is useful to find a health insurance adviser to walk you through the different options.
Or, you could check with your spouse to see if they have health insurance as an employee benefit. Losing your job is considered a “life event” and therefore will allow an employee to make changes to their current years employee benefits. Health related costs are the number one financial reason for bankruptcy. Make sure you have insurance.
Employers are required to fund a federal unemployment insurance program to allow laid off or out of work employees a stop gap between employment. While most people understand this benefit is available, they are unsure how to apply and what the rules are. You will need to contact your state’s unemployment department to get this process started. Each state has a helpful website that will include an application, requirements and other resources to prepare you for this part of your transition. You can then gather the information they will need to complete your application and allow the process to begin.
Understand your liquidity
When assisting my clients in building a strong financial plan, understanding how to handle the unexpected is always top of the list. What we are trying to accomplish is a system of building reserves to allow them to maintain a general standard of living in the event of loss of employment, disability, death, etc. This is never a process that is solved overnight but with some diligence most are able to set aside funds for this purpose. Since a layoff is often unexpected you may not have had the time to build this reserve but you may have a few options at your disposal (in no order of priority.)
This is the most logical option given the fact you will not have to pay interest on any balance such as a credit card would require but many families have not built up a very significant savings account given the many other expenses and savings methods we all try to accomplish.
It’s possible you’ve built up an investment portfolio (not including your 401k/IRAs). This is another great option given the lack of any interest charged or payments required to pay back. You will need to consider taxes but often paying a capital gain on an investment is more efficient that any debt you could incur.
I usually recommend you have a line of credit available in the event you have a short-term cash need. It can allow you to cover expenses while your income is reduced but it comes with a cost. You will be charged interest on any recurring balance and you will have a payment on a monthly basis.
Manage the loss of other benefits
We covered health insurance as it tends to be the first thing someone thinks about when they lose a job. Many forget they tend to carry other important benefits through their employment. Those benefits include life insurance, spousal life insurance, disability insurance, health-care FSA dependent care FSA, etc. While some of these benefits will be lost until you gain new employment, others can be continued. Life insurance, much like your health insurance, falls under the COBRA rules. This will allow you to pay your previous employer to keep those benefits in place. This doesn’t happen automatically so you will need to request the continuation.
Flexible spending accounts (FSAs) have different rules. A health-care FSA may fall under the COBRA rules discussed earlier and would allow you to continue to fund the FSA for medical expenses. The dependent care FSA however does not have a continuation opportunity and typically you will be required to request any funds within 90 days of your separation of service. To get all of the right answers, you will want one of your first calls to be made to your former employer’s human resource department. They will lay out all of your options and give you a road map to put the pieces back together.
Based on my experiences, working with clients going through this process, I know patience will be required. If you can dedicate a day or two to making sure your financial house is in order, you will start to feel some of the anxiety of this event fade away. Make sure to lean on the resources in your life that can assist you as well. If you have a trusted financial advisor, accountant, or even a friend with experience, I suggest you contact them early in this process and allow them to assist you through some of the important tasks we discussed.
Mitch Gripe is the author of this article.
Any opinions are those of the author and not necessarily those of RJFS or Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.