Blessing or curse, unemployment is an issue for many Americans. Here are some strategies for weathering a period of unemployment.
- Take advantage of all the benefits for which you qualify. Collect all unemployment and severance benefits. Investigate public assistance programs, low-income housing programs, free credit counseling services and non-profit organizations that provide help to people in crisis.
- Craft a bare bones budget. List all fixed expenses such as mortgage, rent, taxes, insurance, credit card payments and child support, as well as your variable expenses such as food, gas and prescriptions. Prioritize your expenses—this will help you know what to pay first when money becomes short. Pay secured debt such as your mortgage first, followed by utilities, health insurance and car payments. Meet with your mortgage lender to try to work out a special payment plan. Lenders will be much more willing to work with you if you’re up front about your financial situation and if they know it’s temporary. If you are already behind in your payments, seek the assistance of a credit-counseling agency like GreenPath Debt Solutions at (800) 550-1961.
- Notify your creditors in writing about your financial circumstances as soon as possible. Tell them you need to work out a plan for reducing or delaying payments until you find employment. Include your account number, phone number and address. Follow up with phone calls and take notes on conversations. Keep copies of all correspondence.
- Reduce your expenses. Get rid of high speed Internet access and cable television, cancel magazine subscriptions, eat inexpensive meals at home, use coupons, lower the thermostat on your furnace and water heater, and plan your errands so you’re not making unnecessary trips in the car.
- Resist the urge to tap your retirement funds. You could face significant financial repercussions. Consider this example from MSN Money. A $10,000 withdrawal now from your IRA or 401(k) means $109,000 less for your retirement, assuming the money would grow at an average annual rate of 8 percent for 30 years. You could also lose up to one-half of your withdrawal to taxes and penalties.
- Look ahead. Now is a good time to evaluate your life. Are you where you want to be? Were you happy in your last job, or do you have an itch to do something else? Do you want to go to school? Talk these issues over with your family. You may be looking at opportunities you never thought would be available to you.
Six Ways to Prepare for Life’s Financial Emergencies
Life is full of unknowns. While it’s unsettling to think illness, job loss, or a disaster could drain your financial resources, financial emergencies can and do occur. The good news is that with a little planning you can minimize the impact of an unexpected financial crisis. The Michigan Association of CPAs suggests that you take the following actions.
Calculate Your Net Worth
Looking at your total financial picture is a simple way to know exactly where you stand. Take the time to prepare a net worth statement, which will give you a realistic sense of your assets (what you own) and your liabilities (what you owe).
First, catalog your assets. Your assets include balances in your savings, checking, and other bank accounts; the market value of any stocks, bonds, mutual funds, and Individual Retirement Accounts; and the cash value of any insurance policies you own. Include in your assets the fair market value of your home (less your mortgage amount) and other real estate and personal property.
Next, you’ll need to list all debts, including any outstanding balances on your mortgage, credit cards, and any car, personal, or student loans. Subtract your total liabilities from your total assets to arrive at your net worth. This exercise also makes it easier for you to identify assets that could be used to meet your debt obligations.
Build an Emergency Fund
Most CPAs agree that it’s a good idea to create an emergency fund equal to roughly six to nine months worth of living expenses. The right amount for you depends on your financial circumstances. It will take time and a few sacrifices to set aside that amount of money, but it’s worth the peace of mind it provides in an emergency. Using an automatic savings plan to direct money to your emergency fund is a relatively painless way to save.
Be sure to keep your emergency funds in an easily accessible account, such as a savings or money market account. While the interest rate may be low, bear in mind that liquidity is the goal for your emergency fund.
Be Adequately Insured
One of the best defenses against financial difficulties is a well-formulated plan for insuring yourself and your possessions. Review your home, car, life, and medical insurance policies regularly to ensure sufficient coverage.
Disability coverage is one area that many find themselves underinsured. Disability insurance replaces a portion of your salary if you become disabled and cannot work. Since people in the workforce are more likely to be disabled than to die prematurely, disability insurance is vital to financial security.
Identify Possible Loan Sources and Apply Now
If you own your home, a home equity line of credit can help you through a financial emergency. But it’s important to apply now, while you’re in good health and employed. Unlike a home equity loan, a line of credit is there if you need it. Another advantage is that you can write off the interest on your home equity debt up to $100,000. Just remember that you could lose your home if you can’t pay back money borrowed against it.
Keep up to Date with Your Resume and Your Contacts
It’s always a good idea to have a current resume prepared in case you lose your job. You should also work to maintain a network of key contacts, including friends, associates, and colleagues whom you can turn to during your job search.
Meet with a CPA
Preparing for life’s ups and downs isn’t easy. A CPA can work with you to review your plan and ensure that you are well protected in the event of a financial emergency.
You seek the expertise of CPAs at tax and audit time, of course. But CPAs also promote personal and professional financial security year round. Visit the CPA Referral Service on the MACPA Web site to search for a CPA in your geographical area or specific area of expertise. This article was submitted by the Michigan Association of CPAs.