Financial setbacks happen, be prepared.
You probably have insurance in case of a fire, but what insurance do you have in case you lose your job? What measures have you taken to protect yourself against other unexpected losses of income or large expenditures? You need to create a plan to safeguard yourself and your family against income loss just as you would the loss or damage to your home or possessions.
For instance, if you lose your job, it is widely estimated that you will need 3-6 months of income to hold you over until you find a new one. However, this timeframe is just a basic generalization, each person’s situation is unique to their career path. Your ability to find a new job can be based on various factors such as the type of job you are looking for, the level (i.e. entry level vs. senior management), your skill set and if it is in high demand, your salary requirements, and your relocation options. The reality is that you may be unemployed longer than expected and may need closer to 12 months of salary to keep you financially secure.
To protect yourself in case you are unemployed, it is essential that you accurately anticipate all the expenses and financial obligations you have and create an emergency budget – in advance. It can be helpful to create an emergency budget that consists of four main categories; big financial responsibilities, monthly expenses, “invisible” expenses, and job search expenses.
During unemployment, many people get in financial trouble because they only focus on their financial obligations in the first two categories: their big financial responsibilities such as mortgage payments, car loans, and tuition; and their monthly expenses such as groceries and cable bills. It is very important to take time to consider and include items in the final two categories: invisible and job search. Failure to recognize, and budget for, these items could put you in financial jeopardy.
“Invisible” expenses are for items that are covered by your employer and taken for granted. For instance, when you are unemployed, you may find yourself paying thousands of dollars each month for benefits and perks such as: health insurance, dental/eye insurance, life insurance, long-term care options, annual membership to industry organizations, annual membership to social organizations like country clubs or golf courses, gym memberships, company car, commuter costs, cell phones, laptops, and corporate discounts at other companies (i.e. cell phones bills). These “invisible” items can really add up and are often a surprise because you are used to having the items, but not used to using your own money to pay for them. These costs can be shocking once they are coming out of your own pocket.
The final category of Job Search expenses also surprised people. Most people don’t view looking for a job as expensive, but it is. Networking takes more than time, it takes money. You need to consider all the possible expenses involved such
So, how do you prepare for this type of financial loss?
Think through what you would need to do if you lost your job. Then, create a list of all your possible expenses and responsibilities based on the four categories. Come up with an estimated number you think you will need. And then…start setting money aside now, each month, and until you have saved the funds you need.
Should you take your emergency fund out of your savings account and invest it? NO! Absolutely not! If you lose your job it may be in the middle of the next great recession. What would you do if your emergency fund lost 40% of its value exactly when you needed it?
The safer option is to open a savings account. This account should be with a different bank than your current day-to-day bank. By using a different bank, you will be less tempted to dip into your Emergency Fund. This will protect and preserve your emergency money! Look for a free bank account that pays some interest. Add to this account every month and gradually build your Emergency Fund.
Facing financial insecurity whether losing a job or unexpected large expenditures can be stressful and difficult. But if you start taking steps now to protect yourself and your financial security, you will be able to handle the situation with more confidence and less anxiety.