How to manage money when you're between jobs
(BPT) - Though the U.S. economy has been gradually improving, job changes - both involuntary and voluntary - remain a fact of American working life.
“It's also a fact that bills need to be paid whether you're employed or not,” says J.J. Montanaro, a certified financial planner with USAA.
To help you cover expenses and protect your finances as you transition from one job to the next, Montanaro offers these tips.
1. Decide how to collect your final pay
If leaving your job wasn't your idea, your employer may provide a severance package to ease the financial pain. Amounts vary, but one or two weeks of salary for each year you've worked at the company is typical. If you're given a choice of a lump sum or a stream of payments, consider these factors:
* Benefits. If employee benefits (health care, life insurance, long-term care) continue as long as you're receiving payments, you may want to take the option that prolongs them.
* Your financial discipline. Afraid you might squander a lump sum? If your severance payment provides enough cash to justify dividing it up, choosing periodic payments will help keep you in paycheck mode.
2. File for unemployment benefits
If your employer let you go - provided you weren't fired for misconduct - you'll probably qualify for unemployment benefits. If you quit, usually you can collect benefits only if you left for “good cause,” which generally means there was a problem at work or personal situation so difficult that you had no alternative.
If you think you're eligible, don't procrastinate. It may take two to three weeks to process your claim, so contact your state's unemployment office pronto. While each state's program varies, you can generally count on benefits to last 26 weeks, with federally funded emergency unemployment benefits extending up to 73 weeks in some states. Benefits are based on your income and how long you were employed.
If you separated from the military under honorable conditions, you may also be able to claim unemployment benefits through your state of residency. Check with your state department of labor to get the lowdown.
3. Reduce your spending
If your decision to leave was involuntary and your next employment is an unknown, it's important to preserve your cash while you're out of work; this can require a top-to-bottom examination of where your money goes. “This exercise can help keep you afloat today and be an engine for paying off debt and saving once the paychecks start again,” Montanaro says. Put off big-ticket purchases and reduce discretionary expenses as much as possible.
4. Strengthen your emergency fund
Use your severance pay, unemployment benefits and any money you can save to build a cash stockpile. Keep enough money in a savings account to pay at least three to six months' expenses. For a higher interest rate on the rest of your cash, build a short CD ladder or open a variable rate CD. Be careful not to lock away money that you'll need. If you served in the military and made tax-free contributions to the Thrift Savings Plan, you may be able to tap that money without the taxes and penalties associated with most retirement money.
5. Avoid cleaning your financial slate
While you may be tempted to use your severance or other assets to pay off your car, credit cards or other debt, you may be better off making only the required or minimal payments. This strategy can stretch your cash and help you meet living expenses in case a new job isn't right around the corner.
6. Review your health insurance options
At most companies, federal law allows you to keep your employer-provided health insurance for up to 18 months. Prepare for sticker shock: You will be responsible for the entire premium – what you paid, plus any amount your employer paid.
7. Protect your retirement
If you have a 401(k) or other employer retirement plan, avoid the temptation to cash it out when you leave. In addition to jeopardizing your security when you retire, you could pay a steep price in the form of income taxes and penalties. Instead, roll the money over to an IRA or leave it in the employer plan.