Be Financially Prepared for an Illness or Layoff
What are the steps someone can take to help themselves financially during a layoff, illness, or another reason that puts them out of work?
I love this question—it is at the core of why I decided not to charge people for my services based on assets only. As Tom Hanks said in the movie "Forrest Gump," “Life is like a box of chocolates, you never know what you are going to get.”
It could be argued that financial planning for these events is more important than some of the long-term goals we often talk about (such as retirement, education, etc.), because if an event like this comes along, it could derail all of your plans. (For related reading, see: Should I Invest My Savings or Pay off Debts?)
Why Planning for a Financial Emergency Is Important
Planning actions for these events start prior to the actual event. The number one item I recommend is to build an emergency fund; the fund should range anywhere between 3–12 months’ worth of expenses, depending on the situation and any supplemental benefits that might be available.
- For example, if you lose your job, you will get some benefits during that search period, but how much? It likely won’t replace 100% of your income, so you would need to make sure there is enough in your emergency fund to supplement the unemployment benefits.
- Another example: if you become disabled or need surgery, it's important to know what your disability benefits (if any) would look like. Again, we would want the emergency fund to be able to supplement (or replace) that income while replacement cash flow is explored.
What to Do If No Emergency Fund Exists
If the situation happens and no emergency fund exists, the number one action item would be to sit down with your prior bank and credit card statements and determine where your spending can be adjusted or what debt can be renegotiated. Creating a budget during this period of time (and strictly sticking to it) is a mission critical action. However, planning this in advance is a good exercise too. Especially if it is a sudden illness that causes a loss of income, having the plan in place takes the pressure off an already stressful situation.
Contacting your creditors to ask for a short-term hardship program could reduce your payments, but understand this is a cash flow fix for now, you will want to get right back on track with them as soon as possible.
I also strongly recommend that you do a SWOT analysis on your situation—define those strengths, weaknesses, opportunities, and threats. Knowing those items can help you plan ahead and explore solutions.
Make sure you have some sort of healthcare coverage if it is lost. This can be in the form of the market place, COBRA, or, in some cases, a short-term health insurance policy. (For related reading, see: What You Need to Know About COBRA Health Insurance.)
What If You Lose Your Job?
In the case of a layoff, your new full-time job should become finding a job. Seek guidance from the professionals on this (i.e. through a small business center as an example). You are selling yourself; don’t cut yourself short, make sure you promote yourself to the maximum.
And don’t forget to take advantage of any retraining programs that might be available. Have you always wanted to go back to college for something specific? This could be an opportunity for you to do that. (For more from this author, see: 4 Easy Steps to Create Your Own Budget.)