What to Do When You Lose Your Job

Jane Young, CFP, EA

Jane Young, CFP, EA

Breathe – Losing a job seems like a huge catastrophe when it happens, but it could free you up to pursue new opportunities.  Most jobs are lost due to a reduction in workforce, over which you have no control.   Try to move through this transition with grace.  It’s not personal;  try to avoid becoming sad, angry or bitter.    This process is difficult for everyone involved, and the person letting you go may be in a position to hire you in the future.

Carefully Review Your Severance Package – Make sure you fully understand and agree with the terms of your severance package.  Don’t hesitate to consult an attorney if you are unclear or disagree with the terms of your separation agreement

File for Unemployment – If you were laid off due to no fault of your own, you may be eligible for unemployment benefits.   Unemployment may not be available while you are covered by a severance package.

Review Your Budget – Review your expenses and cut-back on unnecessary expenses.  Develop a new spending plan that will help you cover expenses until you find a new job.   Hopefully, the combination of your emergency fund, severance pay and unemployment will cover your necessities until you find a new job.  To make ends meet, you may need to consider short term assignments or part time work.

Arrange for Health Insurance – Review options available through Cobra as well as insurance on your own.  If you are married, look at health insurance options through your spouse’s employer.

What’s Next?    You have just received the gift of freedom, to make a career change.  Do you want to continue in your current career or do you want to pursue something new?   How much training, education, time and money will it take to pursue your dream career?

 Update Your Resume and Start Job Hunting  – Update your resume and start looking for a new job.  Take advantage of services that may be offered by the outplacement firm hired by your previous employer.  If you decide to return to school, you may need to pursue a part time job while you re-tool.

Build and Nurture Your Network – Most jobs are found through word of mouth.  It’s essential to do a lot of networking.  Let all of your contacts know that you are job hunting and what you are looking for.  Actively maintain accounts on Facebook, Linked In and Twitter to help you with your job search.  It’s also advisable to have personal business cards made so potential employers can reach you more easily.

Use Your Time Wisely – Treat looking for a job as a job.   After a week or so, you should keep your days structured.  Spend your time working toward getting a new job, getting your life organized and taking care of your health.  This is a very stressful time, be sure to eat well and get plenty of exercise.

Protect Your Family Against a Loss of Income

Jane Young, CFP, EA

Jane Young, CFP, EA

In addition to an emergency fund for unexpected short term expenses, you need to protect yourself and your family from a long term loss of income.  If you have a spouse or children who are dependent on your income, you should consider term life insurance and long term disability to provide them with income should you die or become disabled.  If you have no dependents, you should consider long term disability to cover your own living expenses if you become unable to work.  

Although, life insurance can be a dirty word, low cost level term insurance is relatively inexpensive and provides an important safeguard for those who are dependent on your income.  Some common reasons to buy life insurance are to replace income, pay-off a mortgage, and to put your children through college.  The most economical way to meet these needs is through the use of level term insurance.  The amount of insurance you need depends on your objectives for getting insurance.   The term of the insurance should be based on the timeframe during which you need to replace income or pay for other major expenses.   When you buy level term insurance, you have a guaranteed level premium and a guaranteed death benefit, assuming you pay your premiums on time. Unlike whole life insurance, term insurance is pure insurance, there is no investment element.  Once the term has expired there is no residual value. 

It is common to buy level term insurance to cover 20 or 30 years until such time the kids have made it through college or your home is close to being paid off.  To save money, you may consider purchasing several policies with different terms and different objectives. For example, if your mortgage will be paid off in ten years, your kids will be out of college in 20 years and you want to provide your spouse with income replacement for 30 years, buy three policies with terms that correspond with the timeframes of your objectives.

Many people buy life insurance but few people have long term disability insurance.  No one lives forever, but during your prime earning years the probability of becoming disabled is higher than that of dying.  According to the Social Security Administration, over 1 in 4 people who are currently 20 years old will become disabled before age 67.   About 69% of all private sector employees have no long term disability insurance.  If you have loved ones who are dependent on your income, you should consider buying long term disability insurance.

When shopping for life insurance and long term disability shop and compare prices. Do your research and get quotes from several companies with low fees and commissions.  Consider working with insurance brokers who work with a variety of different insurance companies.  They can provide you with information on premiums from several insurance companies along with the companies’ financial strength rating.

Financial Pitfalls to Avoid

Jane Young, CFP, EA

Jane Young, CFP, EA

Below are some common pitfalls that I have observed over the last seventeen years as a financial planner.  You may have a smoother journey toward reaching your financial goals if you can avoid some of the hazards along the way.

Living Beyond Your Means – Take the time to review your monthly expenses and compare them to your income.   Establish a budget where you spend less than you earn.  A good way to deal with unforeseen financial issues is to always save at least 10% of your income and avoid unnecessary debt.

No Emergency Fund – Everyone should maintain an emergency fund of at least three months of expenses.  This should be higher if you don’t have a lot of job security or your income fluctuates.  Without an emergency fund, large unexpected expenses can quickly throw you into a negative debt spiral.

Too Much Debt – Avoiding debt is a mindset.  There is good debt and bad debt – it may be wise to secure a low interest, tax deductible mortgage when purchasing a home.  This enables you to start building equity and reap the benefit of appreciation as the value of your home increases.  However, it is generally not advisable to finance personal items such as furniture and appliances.  If you can’t pay cash, you should probably wait and save up for the purchase.   Avoid credit cards if you can’t pay off the entire balance at the end of the month.  

Overspending on Vehicles – Financing the purchase of a new vehicle can negatively impact your monthly budget.  I have seen clients and friends take on car payments in excess of their home mortgage.  Vehicles are depreciating assets and they are not a good investment.  When possible you should buy a used vehicle and save your money to purchase your car with cash.  Unless you have a lot of disposable income, minimize your vehicle expenses and buy with functionality in mind.

Putting Kids Through College at the Expense of Retirement – I know you love your kids and you want to give them a good start in life but don’t sacrifice your retirement.  There are many ways to minimize college expenses and finance a college education.  You can’t take out a loan to finance your retirement.

Get Rich Schemes – I’ve heard them all – every few months someone will ask me about some new product or investment scheme that promises low risk, double digit returns.  There is no free lunch, if it sounds too good to be true, it is! 

Emotional Reaction to Movements in Market – Stocks are long term investments, you need to be willing and able to ride out the fluctuations in the market.   Over long periods of time, the stock market has trended upward; however, there will be periods with negative returns.  Avoid the natural tendency to react emotionally to market downturns.  Stay the course and follow your long term plan.

Here Are Three Simple Secrets to Investment Success

Jane M. Young, CFP, EA

Build a Portfolio to Support Your Investment Timeframe

Investment timeframe is a major consideration in developing an investment portfolio.  Start with an emergency fund covering about four months of expenses in a cash account with immediate access.  Next, put aside money that is needed over the next few years into fixed income vehicles such as CDs, bonds or bond funds.  Invest long term money into a combination of “stock based” mutual funds and fixed income investments based on your tolerance for investment risk and volatility.  Historically, stock has significantly out-performed fixed income investments but can be volatile during shorter timeframes.  Stock is a long term investment; avoid putting money needed within the next five years in the stock market.

Diversify, Diversify, Diversify

Once your emergency fund is established and funds have been put away for short term needs, it’s time to create a well-diversified investment portfolio.   We cannot predict the next hot asset class but we can create a portfolio that will capitalize on asset categories that are doing well and buffer you from holding too much in asset categories that are lagging.  Think of the pistons in a car, as the value of one asset is increasing the other may be falling.  Ideally, the goal of a well-diversified portfolio is to have assets that move in opposite directions, to reduce volatility, while following a long term upward trend.  It is advisable to diversify based on the type of asset, investment objective, company size, location and tax considerations.

Avoid Emotional Decisions and Market Timing

The best laid plans are worthless if we succumb to our emotions and overreact to short term economic news.  Forecasting the short-term movement of the stock market and trying to time the market is fruitless.   We can’t control or predict how the stock market will perform but we can establish a defensive position to deal with a variety of outcomes.  This is accomplished by maintaining a well-diversified portfolio that supports our goals and investment time horizon. 

The stock market can trigger our emotions of fear and greed.  When things are going well and stock prices are high we become exuberant and want a piece of the action.   When things are bad and stock prices are low we become discouraged and want to get out before we lose it all.  The stock market is counterintuitive, generally the best time to buy is when the market is low and we feel disillusioned and the best time to sell is when the market is riding high and we feel optimistic.  We need to fight the natural inclination to make financial decisions based on emotions.   Don’t let short term changes in current events drive your long term investment decisions.

No one knows what the future holds so focus on what you can control.  Three steps toward this goal are to create a portfolio that meets your investment time horizon, create and maintain a diversified portfolio and avoid emotional decisions and market timing.

 

 

1 2 3 4