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How to Prepare Financially for Losing Your Job

Sometimes, it’s clear you’re about to lose your job before it even happens.

Maybe there’s been a merger at your company and colleagues have already begun to be laid off.

Maybe you’re just not meshing with your boss and you can feel that the end is coming.

If this describes your situation, don’t panic.

In fact, if you know that you’re going to get fired or laid off before it happens, you have an advantage in the sense that you have additional time to make preparations.

Since losing a job typically involves a financial shakeup, use this time to get your affairs in order and shore up your finances as best you can.

Here are some steps you can take to get all your ducks in a row and improve your chances for a smooth transition out of your job.

Signs You Might Be Getting Fired

Some employees have a “sixth sense” and can just tell they are about to be fired.

If you’re not one of these people, look around for these physical signs that you might be headed towards a layoff.

1. Your boss puts things in writing

In a normal work environment, day-to-day duties are generally unspoken agreements between labor and management.

If your boss suddenly starts giving you written instructions or asks you to sign documents indicating work you’re promising to do, it could be a red flag.

In some cases, this could be an indication that your boss is compiling a written record of your work to be used against you.

2. You’re excluded from projects

If you’re suddenly being left out of work projects that you might normally be expected to partake in, it could be an indication that your job is being farmed out to other people.

It could also be seen as a lack of confidence in your work.

In either case, it might be the first step towards being laid off.

3. You’re under performance review

When you take a job, you’re expected to perform at a certain level.

If you’re put on probation or are undergoing a performance review, it means that someone higher up isn’t satisfied with your work product.

Unless you can turn things around quickly, this might be an indication that you’re being pushed towards the door.

4. You made a major mistake

Some work mistakes are recoverable. Others may not be.

If you make a major mistake at work, you might not get fired right away.

In some cases, the longer-term effects of your mistake might need to be evaluated first. In others, your actions might be subject to further internal review before any action is taken.

However, if you messed things up in a big way, you might want to prepare yourself for a new job.

5. People are paying more -- or less -- attention to you

A big hint that you might be on the chopping block at work is if the attention level to your work has suddenly changed.

If you’re being watched more closely, it could indicate a lack of trust in your performance.

If you’re being ignored, it could mean that there’s a lack of faith in your abilities and that you aren’t being assigned higher-level work.

6. Your company is undergoing a merger

One of the most common ways that workers are laid off is if there’s a corporate merger.

When companies merge, there are often numerous employees performing the same work, creating redundancy.

In an effort to cut costs, these now-redundant workers are often laid off.

Even if you’re performing well at work, it’s possible that there’s now another employee in the company that can do your work better or cheaper.

Whatever the reason, mergers are often a sign that layoffs are coming.

Action Steps to Take

If you have even the slightest inkling that you might be fired, you can take some positive steps to prepare yourself for what’s coming.

1. Don’t quit

It might not sound proactive, but if you think you’re going to lose your job, staying put and waiting for the inevitable is an important step in the process.

If you quit, you lose a lot of your leverage in the situation.

Particularly in a layoff situation, you might be offered an attractive severance package if you stay put. If you voluntarily quit, you’re likely on your own.

Quitting might also result in the forfeiture of your options or other benefits.

Perhaps most importantly, if you quit your job, you might be ineligible to receive unemployment insurance.

2. Begin your job search

There’s no rule that says you have to be unemployed to look for a new job.

In fact, searching for a new job while you currently have one is generally a better course of action.

It’s usually easier to get a job when you already have one because you won’t have to explain any gaps in your resume, or why you were fired from your prior job.

Don’t be afraid to look for higher-paying jobs while you search. It’s entirely possible that you are underpaid at your current position, and that your experience and skills can command a higher salary in a new job.

Ask friends or relatives for recommendations about current job openings that they may have heard up.

Sign up for job search websites or professional network services, such as LinkedIn, to aid in your search.

3. Look into unemployment benefits

States have different requirements for unemployment benefits.

However, eligibility typically requires that you were fired through no fault of your own and that you are actively seeking work.

Unemployment benefits are not automatically paid out. You’ll have to file the required forms with your state unemployment agency, and you may have to provide regular updates as to your status to continue receiving benefits.

You can usually file an unemployment claim online by providing information about your employment and the reason why you were terminated.

In most states, unemployment benefits last for 26 weeks.

Currently, these nine states pay benefits for fewer than 26 weeks:

  • Arkansas
  • Michigan
  • South Carolina
  • Missouri
  • Idaho
  • Kansas
  • Florida
  • Georgia
  • North Carolina

If you anticipate being fired or laid off, contact your state unemployment office to determine what your eligibility for benefits might be, and for how long those benefits might last.

Assuming you qualify, you’ll want to get your paperwork in order so that your benefits can start as soon as possible.

4. Start cutting expenses

The term “lifestyle creep” refers to the natural tendency to spend more when you earn more.

Oftentimes, lifestyle creep is very gradual. If you don’t budget, you might not even notice it happening at all.

But if you’ve been getting regular raises over your career, take a look back at how much you used to spend in an average month 10 years ago versus what you spend now.

You might be surprised to see how your expenses have risen right in line with your income.

If you think you’re about to lose your job, you’d be well-served to trim back some of these expenses now, before it happens.

For example, when you review your expenses, you might see that you spend twice as much money eating out as you used to.

Other areas that are often subject to lifestyle creep are entertainment and vehicle expenses.

If you’re going to lose your job, you might think about cutting back on going out, or whether or not you really need a flashy, expensive car.

The bottom line is that if you are earning less, you should be spending less, so prepare now for that eventuality.

One of the best ways to get your income and expenses in line is to draft a budget.

You can create a simple budget on a piece of paper by listing all your expenses on one side and your anticipated income on the other.

There are also many free budgeting apps and services available online or from your financial adviser.

5. Top off your emergency fund

Most financial advisers recommend keeping at least 3 to 6 months of income in an emergency fund to cover unexpected expenses.

For most people, losing their job is considered an emergency.

In fact, having the ability to survive at least three to six months after losing a job is considered by some to be the primary reason to have an emergency fund.

Ideal Size of an Emergency Fund

To start... Ideal goal... Super safe...
$1,000 3-6 months of essential expenses 12 months of expenses

If you haven’t started an emergency fund, you should do all you can to fund one if you suspect a job loss may be imminent.

While three to six months of expenses is considered a guideline, to be safe, you should try to stash as much as possible in your emergency fund.

This is because it might take you more than three or six months to find another good job.

Job search consultants often suggest that it takes one month on average to find a job for every $10,000 of income you’re looking for.

For example, if you’re looking for a job that pays $100,000 per year, you should expect that it could take up to 10 months to find that job and get hired.

While this is by no means a hard-and-fast rule, it’s a helpful guideline.

If you’re coming from a high-paying field, you might consider trying to keep at least 12 months of expenses in your emergency fund.

Keep the funds in an online savings account so you can earn interest while still keeping your funds liquid and easily accessible.

6. Read the fine print on your loans

If you’re still paying off your student loans, contact your loan provider to see what options you may have if you lose your job.

With federal loans, you may be able to apply for deferment or forbearance.

Compare Deferment vs. Forbearance

Deferment Forbearance
Pros:
  • You can postpone student loan repayment for an extended period of time, usually up to three years
  • You may not be responsible for paying accrued interest during deferment
  • You’re able to keep your loan in good standing and avoid defaulting on them
  • Available for many federal student loans (a.k.a. government-funded loans)
  • Pros:
  • You can postpone repayment for a few months (usually 6 to 12 months)
  • There’s no limit to the number of forbearances you can request (although you may not always get approved each time you request one)
  • Federal student loans and private student loans are eligible
  • Cons:
  • Some private student loans (a.k.a. bank-funded loans) may be eligible for deferment while you're still in school, but deferment isn’t generally an option until after graduation
  • Qualifying for deferment typically depends on the type of federal student loan you have, so certain loans may not be eligible
  • The total amount you repay over the life of your loan may be higher if you don't pay interest while you're in deferment
  • Deferment is not a permanent option - you are still required to pay back your student loans, although you've received this temporary break
  • Cons:
  • You’re responsible for paying interest that accrues during forbearance
  • Your loan servicer may set a limit on the maximum period of time you can receive a general forbearance
  • Forbearance is not a permanent option for your student loans - you are still required to pay them back, although you've received this temporary break
  • With a deferment, you can stop making payments on your student loan and you won’t accrue any additional interest.

    With forbearance, you can temporarily stop making payments, but interest will continue to accrue on your loan.

    Forbearance may be allowed for up to 12 months, while deferment in the case of unemployment could extend up to three years.

    You may also be able to switch your loan to an income-based repayment plan, which bases your payment amount on the income you earn.

    Options may be more limited with private student loans. You’ll have to contact your provider to see what options they may offer.

    If you have any outstanding personal loans, you can ask if your loan providers offer loan protection insurance, also known as payment protection insurance.

    Essentially, this is an insurance policy that makes your loan payments for you if you lose your job.

    Coverage is generally extended for between 12 and 24 months.

    Although this insurance comes at an extra cost, it might be worth it if you think a job loss is on the horizon.

    Payment protection insurance can help protect you from default on your car loans, credit cards or personal loans while you are unemployed.

    The last thing you want in that situation is to ruin your credit by defaulting on your loans, so having such a policy in place can provide you with peace of mind.

    Conclusion

    No one wants to lose their job.

    If you have an inkling that you might be on that path, however, take advantage of that knowledge and put your financial protections into place.

    If you end up being right and you get laid off, you’ll be ahead of the game.

    Ideally, you’ll have established a big emergency fund, you’ll already have some viable job leads (and maybe even interviews), and your trimmed-down expenses will help you weather the storm.

    If you end up being wrong, all of those preparations will not have been in vain.

    In fact, you should be in a better financial position than when you started.

    By building up your emergency fund, you’ll be prepared to weather any financial emergency, even if it is not job-related; by checking out the job market, you’ll know your value in the marketplace and have an idea about what your other options might be; and by trimming down your expenses, you’ll be in a position to keep more of what you earn.

    Even if you don’t have any inkling that you may be laid off, these financial exercises can prove worthwhile for anybody.