Bolstering Your Budget After a Sudden Job Loss

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We’ve all been there. You had a job. Now you don’t. What do you do for money? Here’s how to survive a job loss and start all over again.

Cut Out Discretionary Spending

Discretionary spending is spending that you don’t need to do, but that you take on because you have extra money. Most people think of this as “play money” or “entertainment money.”

This is where you need to cut back in your budget. If you’ve made a lot of commitments to banks by taking on a lot of debt, unfortunately, you don’t have much discretionary spending. You will have to drop your monthly payments to the minimum allowed.

On credit cards, this means dropping the payment to the lowest or minimum monthly payment. If you’re paying extra on your mortgage, stop. You can’t afford it now.

A site like Money Looms can also give you ideas on what else you can cut out of your budget to slim down your expenses and beef up your savings.

Negotiate a Severance Package, If You Can

Not all companies offer a severance package. But, if you’ve been at a job for many years, you might have one coming. Even if your company doesn’t formally allow for such generous benefits, you could ask about one. Who knows? Maybe your years of dedication and service have earned you a bonus.

Focus on your dedication and your need for money to get you through to the next job opportunity during negotiations. Not all employers will cave to your request, but the better ones will.

A severance package typically lasts about 3 to 6 months, and is enough money to pay your normal bills and expenses. Don’t expect your boss to pay for a vacation or expensive weekend trips, or even a night on the town.

These deals usually run pretty tight and cover only your normal living expenses. Sometimes, they only cover important or essential items, like groceries, a mortgage or rent payment, and utilities.

Still, it’s better than leaving with no money at all.

Find Some Part-Time Work

Part-time work may help you get through a slump and provide you with enough money to pay the bills until you can pick up full-time work.

Don’t be too proud to take work from companies that you otherwise wouldn’t consider. That doesn’t mean you have to go to work for a fast food company, but it might mean taking a substantial pay cut.

You might have to work jobs that are entry-level in your industry or even in a totally unrelated industry.

Tap Into Savings

Savings is going to be your best friend when there’s no work. Unfortunately, if you’re like most people, you don’t have a lot of savings built up.

Even if you do, it’s probably locked up in a 401(k) or IRA. Getting to that money won’t be easy, but it is possible. If you had a 401(k) with a company, you may have to move that money to an IRA and then withdraw money under established hardship provisions.

Under IRS rules, a hardship withdrawalcan be made from a 401(k) if there is an immediate and heavy financial need. The need must be an amount that is necessary to satisfy the financial need and can include the employee’s spouse or dependents.

Under the Pension Protection Act of 2006, hardship withdrawals can also be taken for the needs of the employee’s non-spouse or non-dependent beneficiary.

IRAs have more restrictive hardship provisions which aren’t technically hardship provisions at all. You may tap your IRA without a penalty to pay for health insurance (only if you’ve collected federal or state unemployment compensation for at least 12 consecutive weeks), for college expenses, to buy a first home, or if you want to cash out early and permanently.

The early cash-out provisions under IRS rule 72(t) state that you must take at least one distribution annually for the exception to apply and that you must take substantially equal payments over your life expectancy or the join life expectancies of you and a named beneficiary.

For most people, this isn’t such a great deal because the individual payments would be very small, especially at young ages.

It is, however a great way to back out of an IRA if you know you will never use it in the future.

If you were in the military, or military reserves, you can take withdrawals from the IRA if you are ordered or called to active duty after September 11, 2001 for a period of more than 179 days. The distribution has to be made during the active duty service period to avoid the penalty.

If you’re a beneficiary of an IRA, you can also take withdrawals and you don’t have to take payments. You can take lump sum amounts.

Finally, if you have any cash value life insurance policies, or if you have any savings in a savings account or open lines of credit (HELOC or credit cards), consider using them to get you through a month or two. But, loans against your home, and credit card debt, can become onerous when the bill comes and you have no income to pay the balance.

Avoid Long-Term Commitments Or Big Expenses

Long-term commitments should be avoided when you don’t have a job. So, no signing any loan applications if you know you’re going to lose a regular source of income. Don’t enter into any agreements, sign up for a new cell phone plan, don’t renew any financial agreements, and commit to becoming a semi-hermit.

Allen Foster has held a number of senior roles related to financial planning. He is pleased to provide advice and tips to a wider audience online. His tips and advice can be found on a variety of different websites.