The Fallback Position for Surviving Unemployment

What individuals do right after learning that they will be laid off could have a dramatic impact on how well they survive the furlough, financial experts say.

Those who act quickly to tally and preserve their assets are likely to emerge reasonably intact, while those who delay could find themselves financially devastated long after they’ve found new employment.

What should you do the moment you receive a layoff notice?

* Apply for unemployment compensation. It typically takes from three to five weeks to get your first unemployment checks, which makes applying as early as possible advisable. In addition, you need to know how much you’re likely to get in order to plan the rest of your budget.

You can assume your unemployment checks will amount to only a fraction of your normal salary. On average, individuals receive less than 40% of their usual weekly wages through unemployment compensation, although lower-paid workers can receive a higher percentage.

* Tally your assets and liabilities. If you have never done a budget before, now is the time. Figure out exactly how much you spend each month on housing, food, clothes, insurance, utilities and entertainment. Then figure out exactly how much take-home income you can expect while unemployed. This would include a spouse’s income, earnings from investments, unemployment compensation, alimony, child support and any other continuing monthly income.

Now put together a “bare bones” budget, said Jan Walsh, a certified financial planner and academic associate at the College for Financial Planning in Denver. Cut down on all non-essential expenses in order to live within--or close to--your monthly income. If you find a new job quickly, this will just keep you from depleting your savings or falling into debt. If your job search takes longer, this process could save you from poverty.

* Consider your health insurance options. Normally, when you lose a job, you also lose company-sponsored health coverage. If you have a working spouse who has a health plan at work, you may be able to transfer yourself (and your dependents) to your spouse’s plan. (Although most plans only allow you to change health coverage once or twice a year during “open enrollment” periods, many waive such restrictions for those who suddenly lose other health coverage.)

If you don’t have the option of enrolling in a spouse’s plan, you might want to continue your health coverage through your former employer. The COBRA law requires that companies allow ex-employees to stay on their health plan for up to 18 months, provided the worker pays the insurance premiums. This can be relatively expensive, but in many cases, it’s better than going without health coverage.

* Weigh the best use of any severance payments you may receive. Many people spend these payments almost as quickly as they get them, either to cover living expenses, pay down debts or on other essential and non-essential items. However, if you can set aside all or the bulk of this money in a savings account, you’re probably better off. A financial cushion is always helpful.

* Take a look at your investments. If you have invested in mutual funds, life insurance or real estate, you might consider formulating a plan to liquidate those assets, Walsh said. Your plan should take into account market conditions and possible penalties for selling or withdrawing the funds early. Many life insurance policies, for instance, levy steep “surrender” fees on those who take their money out within the first few years of the policy. If liquidation becomes necessary, your plan should help you get the most from these investments.

* Examine retirement account savings. You may have the ability to borrow from your (or your spouse’s) 401(k) or pension plan, which is generally an economical way to go if you need money. These loans are not considered distributions, so you don’t usually incur tax liability on the amount you’ve borrowed. If you can avoid it, you should not withdraw money from these plans permanently because that will force you to pay both income and excise taxes on the withdrawn amount.

If you get a lump-sum distribution from your pension, you probably should roll it into an Individual Retirement Account to preserve its tax-deferred status. If you need the money later, you can withdraw the amount you need and pay the tax as required.

* Consider talking to your creditors. You may want to tell them up-front about your job loss and try to work out extended payment plans. This can be risky, however. If you have no savings, you can sometimes get by between jobs by borrowing on credit cards. But if you’ve told your creditors that you’re jobless, they may pull your credit.