For many Americans, there is no scarier word than “unemployment.” Whether due to layoffs, business closures, health problems or otherwise, losing your job is always stressful. According to the American Journal of Public Health, people who are unemployed experience higher rates of depression and anxiety. But there are ways you can take control of your finances, manage your budget and ultimately land on your feet, even during long periods of unemployment.
Maintaining your financial health during a period of unemployment is key to managing your physical and emotional wellness. Cutting expenses is a great place to start, as you learn to trim your budget and rethink your essential and nonessential expenses.
Of course, it’s always better to be prepared before you become unemployed in the first place. Starting an emergency fund and building up a healthy savings account can help you be financially ready in case you’re ever unemployed again.
The COVID crisis has made unemployment a reality for millions of Americans. And while unemployment during COVID-19 is the reality for many people, these practical steps will help you take stock of your situation and manage your money during unemployment and beyond.
Your Steps to Financial Health While Unemployed
If you’ve recently lost your job, maintaining your financial strength might seem challenging, if not impossible. It can be intimidating to think about everything you need to do to manage your money while you’re unemployed. With the right tools and a pragmatic approach to expenses, you can stay on top of your budget and at the reins when it comes to your financial health.
Monitor Your Expenses
It may seem counterintuitive to monitor expenses when you don’t have enough money to pay them all. While it seems easier to go into defensive mode and hold onto every cent you've got, monitoring your expenses and knowing where you’re at financially will actually help give you a sense of peace that you’re taking control of your expenses.
Use a Budgeting Tool
While you’re unemployed, it’s essential to be more proactive than ever about managing your budget. If you’re used to a steady income, you might need additional support in the form of a budgeting tool, such as an app or worksheet. Here are some budgeting tools that can help you keep track of your spending while you get back on your feet.
- Mint: A free mobile app that syncs all of your accounts in one place, tracks your spending and monitors your credit score.
- Goodbudget: A free mobile app based on the “envelope system” of budgeting, in which you devote a certain amount of money to your essential spending categories each month.
- Consumer.gov: Free monthly budget worksheet, ideal for those who don’t want to use a mobile app.
Separate Essential and Nonessential Expenses
To manage your finances effectively during unemployment, your first step is to get a realistic picture of your expenses.
Make a list of all your current sources of income (if any), as well as what you have available in your checking and or savings accounts.
Make a list of everything you usually spend money on each month.
Divide these expenses into the essentials and nonessentials.
Plan where you’re going to trim your spending.
You might have to make hard choices about which bills you pay — such as paying your utility bills before making your regular credit card payment. You should make these decisions in advance before your financial situation gets more challenging.
Determine How Much You Need to Spend Each Month
Some money-conscious people rely on the 50/30/20 rule to keep track of their monthly expenses and savings. Even without income coming in, or with less income than usual, you can modify this rule to make sure you spend wisely and even save.
What is the 50/30/20 rule?
- The 50-20-30 (or 50-30-20) budget rule is an intuitive and simple plan to help people reach their financial goals.
- The rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must-have or must-do.
- The remaining half should be split up between 20% savings and debt repayment and 30% to everything else that you might want.
- The rule is a template that is intended to help individuals manage their money and save for emergencies and retirement.
- Americans have significantly high debt levels, totaling $14.3 trillion as of March 2020.
Needs are those bills that you absolutely must pay and are the things necessary for survival. These include rent or mortgage payments, car payments, groceries, insurance, health care, minimum debt payments and utilities. These are your "must-haves." The "needs" category does not include items that are extras, such as HBO, Netflix, Starbucks, and dining out.
Half of your after-tax income should be all that you need to cover your needs and obligations. If you are spending more than that on your needs, you will have to either cut down on wants or try to downsize your lifestyle, perhaps to a smaller home or more modest car. Maybe carpooling or taking public transportation to work is a solution, or cooking at home more often.
Wants are all the things you spend money on that are not absolutely essential. This includes dinner and movies out, that new handbag, tickets to sporting events, vacations, the latest electronic gadget, and ultra-high-speed Internet. Anything in the "wants" bucket is optional if you boil it down. You can work out at home instead of going to the gym, cook instead of eating out, or watch sports on TV instead of getting tickets to the game.
Finally, try to allocate 20% of your net income to savings and investments. This includes adding money to an emergency fund in a bank savings account, making IRA contributions to a mutual fund account, and investing in the stock market. You should have at least 6 to 9 months of emergency savings on hand in case you lose your job or an unforeseen event occurs. After that, focus on retirement and meeting other financial goals down the road.
Savings can also include debt repayment. While minimum payments are part of the "needs" category, any extra payments reduce the principal and future interest owed, so they are savings.
Importance of Savings
Americans are notoriously bad at saving, and the nation has extremely high levels of debt. As of March 2020, Americans have $14.3 trillion in total debt, which includes $438 billion in credit card debt. The personal savings rate in 2019 was 7.6%, down from 11% in 1960.
The 50-20-30 rule is intended to help individuals manage their after-tax income, primarily to have funds on hand for emergencies and savings for retirement. Every household should prioritize creating an emergency fund in case of job losses, unexpected medical expenses, or any other unforeseen monetary cost. If an emergency fund is used, then a household should focus on replenishing it.
Saving for retirement is also a critical step as individuals are living longer. Calculating how much you will need for retirement and working towards that goal, beginning at a young age will ensure a comfortable retirement.
If you lose your job, you should immediately file for unemployment benefits through your state. Unemployment insurance (UI) payments vary widely throughout the U.S., but according to the Brookings Institute, they usually replace around half of your usual wages or salary for up to 26 weeks.
Even if you don’t think you qualify for unemployment, the application is worth a try. Visit your state’s local unemployment insurance website via the U.S. Department of Labor’s Career One Stop.
Food Stamps and Temporary Assistance
If you find yourself needing assistance with groceries and food while you’re unemployed, consider applying for the federal Supplemental Nutrition Assistance Program (SNAP) or the Disaster Supplemental Nutrition Assistance Program (D-SNAP) through your state. This program allows you to buy groceries for yourself and your family at local stores if you're eligible.
Those who need immediate food assistance should contact the U.S. Department of Agriculture’s National Hunger Hotline.
For financial assistance, you can also apply for help through the Temporary Assistance for Needy Families (TANF) program at the U.S. Department of Health and Human Services’ Office of Family Assistance.
Free or Discounted Healthcare
If you lost your job, you can still apply for health care coverage through the Health Insurance Marketplace. Your healthcare plan eligibility and your premium are determined by your household's size and income level — not your employment status.
Depending on your income level, you might also be eligible for Medicaid or the Children’s Health Insurance Program (CHIP).
If you have health insurance through your employer, you can often get continued coverage through COBRA. And if you decide not to sign up for COBRA, you’ll have a special enrollment period of 60 days to enroll in coverage through the Marketplace.
Of course, you can often find additional or emergency help while you’re unemployed at local charities and nonprofits near you.
Check your local listings for food banks and pantries at Feeding America. You can also find services like emergency rent assistance, health screenings, child care assistance and housing resources through the Homeless Shelter Directory or Catholic Charities USA.
Look Into New Income Sources
While you’re looking for full-time employment, it’s a good idea to explore alternative or additional streams of income as well — like side gigs, part-time jobs and temp work. And who knows? In today’s ever-shifting economy, you just might find that multiple side hustles are more profitable anyway.
The modern workplace has shifted increasingly towards the gig economy, including freelance gigs, flexible work, remote jobs and independent contractor positions. According to the Bureau of Labor Statistics, over 55 million Americans participate in the gig economy.
A period of unemployment is a great time to explore possible side hustles such as freelance writing, graphic design, renting out rooms, driving for rideshare or delivery services, caregiving, babysitting and tutoring. You can look for gigs at sites like FlexJobs, Upwork or Guru.
You might consider working with a temp agency — which will place you with companies that need seasonal staff, overflow employees or replacements while an employee is on leave — while you’re looking for a full-time job.
There are many benefits to working with a temp agency rather than going it alone as an independent contractor or freelancer. Many agencies provide benefits, such as health care coverage and retirement plans, to temporary employees. Working with an agency also prevents gaps in your resume, which could look impressive to potential future employers. You can even use your time as a temporary employee to explore new careers.
Part-time jobs are also a good option if you’re newly unemployed. Like temp jobs, part-time jobs can offer a sense of stability and an additional income stream to bridge gaps in your salary and resume. What’s more, they can also be good for your mental health, as you won’t feel as isolated from others when you’re working alongside others.
Part-time jobs can also be beneficial if you’re looking for full-time work. They can put your mind at ease about your finances while leaving time in your day for a more in-depth job search.
Consider Taking Out a Loan
While you shouldn’t rely too much on loans during unemployment, they can be an option to help you bridge a short-term gap between your income and your expenses. These might include home equity loans, personal loans or additional lines of credit.
Don’t be afraid to seek out a lifeline when you need one. Still, make sure that you’re not biting off more than you can chew by borrowing more than you can pay off later or getting into deeper credit card debt.
Line of Credit
Credit card companies are sometimes wary of opening new lines of credit for unemployed individuals. Still, if you have a good credit score and other income sources, you may qualify for a new credit line. The introductory 0% APR period offered by many credit card companies can help you while you get back on your feet, as you won’t be charged interest right away.
Home Equity Loan
If you own a home or other real estate, you may qualify for a home equity line of credit (HELOC). This revolving line of credit allows you to borrow against your home equity if you’ve been making mortgage payments for some time. While this approach can be beneficial during a period of unemployment, proceed with caution: You’re putting your home up as collateral.
Tapping into your retirement fund, such as a Roth IRA or 401(k), is something you want to avoid if possible if you’re unemployed. But taking out a personal loan is one option that can help you stay afloat. You can take out a loan against your 401(k) in some cases, but taxes become due on it if you can’t pay it back.
Suppose you have an income source or proof of your ability to repay a personal loan, such as unemployment benefits, alimony, child support, your spouse’s income, disability or retirement benefits. In that case, you may be able to take out a personal loan even if you’re unemployed. If you have difficulty qualifying for a loan, you might try to reapply with a cosigner with a stronger credit history or higher income.
It’s best only to borrow what you know you can pay back quickly, however. Your interest rates might be higher if you borrow money while unemployed.
Plan Ahead by Starting an Emergency Fund
A solid emergency fund can serve as a lifeboat in a financial storm, keeping you and your family afloat during the worst of a crisis like unemployment.
But according to the Federal Reserve’s Report on the Economic Well-Being of U.S. Households in 2018, many Americans are not financially prepared for emergencies, including unemployment. In fact, over one-quarter of Americans surveyed said they could not cover an unexpected $400 expense without having to borrow money or sell something, while 12% of those surveyed said they couldn’t cover an unexpected $400 expense at all.
Building an emergency fund can help you navigate a financial crisis — and sometimes even come out with a better budget than before. In addition to cutting your expenses and searching for side gigs, here are a few steps you can take to start building an emergency fund:
- Shop around for better rates on your credit cards, car insurance, homeowners or renters insurance and phone and cable plans.
- Consider refinancing your auto loan or mortgage.
- Clear out your used, unwanted items and sell them in a yard sale or online.
- Cancel your subscriptions and other recurring payments for anything you don’t need or regularly use. Save the difference.
- Treat any unexpected income, such as birthday gifts, commissions, or tax refunds, as automatic savings.
Resources for the Coronavirus Crisis
The coronavirus outbreak has placed additional strain, both in the U.S. and globally, on many people’s financial security and employment situations. In fact, according to the U.S. Bureau of Labor Statistics, over 30 million workers in the U.S. lost their jobs or crucial work hours, at least temporarily, due to the COVID-19 crisis.
Here are some crucial resources for those struggling with COVID-19 and unemployment or the coronavirus pandemic's financial impact.
- BLS COVID-19 Questions and Answers: The U.S. Bureau of Labor Statistics gathers data on the coronavirus pandemic and unemployment as the crisis evolves.
- U.S. Department of Labor Coronavirus Resources: Find information about unemployment insurance flexibilities, family and medical leave and workplace safety during COVID-19.
- CareerOneStop’s Unemployment Benefits Finder Help: Find COVID-19-related information about unemployment benefits.
- Mayo Clinic, COVID-19 Pandemic: Coping With Effects of Unemployment: This Mayo Clinic resource helps newly unemployed people cope with the stress of job loss and reduced hours.
- Mental Health America’s Mental Health and COVID-19 Information and Resources: Mental Health America provides mental health information and resources for COVID-19 frontline workers, caregivers, parents and people struggling with their finances.
Have questions about your finances? Contact us today to schedule an appointment.
Gowdy Financial Group, LLC., is a Fee-Only, Financial Advisory firm dedicated to helping women, from all backgrounds and income levels, get out of debt, save toward your goals and enjoy the freedom that comes with being in control of your money. We don't sell products; we provide solutions. "Your Goals. Our Solutions." Serving Clients Nationwide.