Manage Your Personal Finances
When facing career transitions or under-employment, it is essential to get your money life in order. For many of us this will be the first time ever to live on a bare bones budget. Time to shift gears and put emotions aside as you gain clear picture of the current situation and an outlook for next 6-12 months.
Immediately start a clear personal financial plan that includes:
- Identifying total income sources
- Reduction of all unnecessary spending
- Change in savings
- Prioritization of paying bills
- Maintenance of health insurance
- Communication with creditors
- Seeking financial expertise advice
Creating cash flow road map and a clear budget detailing your income and fixed expenses is your immediate need. Knowing what your money situation looks like can relieve fear and help you stay focused on a plan.
You income is the biggest concern as that steady paycheck is not coming. Your limited income picture needs to be documented clearly including severance, unemployment payments, savings and investments could you tap, as well as borrowing options such as potential loan from family, home equity lines of credit, whole life insurance, 401K loan and credit cards. Tapping 401(k) retirement savings should be last resort as you have to pay taxes on the money PLUS 10% early withdrawal penalty if you’re younger than 55. The early withdrawal age is usually 59.5 but in case of a layoff it is reduced to 55.
Next you need to list fixed expenses that you are committed to fulfilling like mortgage or rent, car payment, utilities, college loans, food. List the discretionary expenses like dinner out, gym membership, vacations, shopping for clothes.
Your goal is to create that bare-bones baseline budget. Making good choices during a crisis is key. Recognize you will need to stop all saving, to college savings plans and individual retirement accounts, for example. Stop all pre-paying your mortgage and credit cards. Preserving cash is the short-term priority.
While Cobra is usually what people maintain after being laid off, it maybe a good idea to search the private market as well. You need to maintain some form of health care. If you can move to your spouse’s health care this is obviously your first priority.
The most uncomfortable part is calling your creditors to explain your current situation and your plans to change it. Directly ask if they can offer ways they may be able to offer temporary relief – they are in a better position to help when you are proactive, reaching out before you miss payments. They may be able to defer payments or reduce interest. Long-term options may include consolidating multiple accounts however this will depend on the health of your credit score. Utility companies may have hardship programs offering reduction on utility bills for short term. Most important is to contact your mortgage provider to avoid foreclosure. Student loans should be placed on hardship deferral or forbearance to buy time.
While your creditworthiness cannot be your focus, try to protect what you can. Your credit score includes paying bills on time, any creditors who have sent you to collections, the amounts you owe in relation to available credit. Low credit scores can hinder your ability to recover from a job loss as some employers conduct credit checks before hiring and landlords may run credit check if you want to rent an apartment. You will hope to avoid personal bankruptcy as not all debts are dismissed and it will dramatically impact your credit for 10 years in the case of Chapter 7 bankruptcy.
Credit counseling might help by visiting nfcc.org. Federal Trade Commission debt relief services advice at consumer.ftc.gov/articles/0150-coping- debt and consumer.ftc.gov/articles/0153-choosing- credit-counselor.
Reviewing your current situation with a financial planner may be the right decision as you navigate this difficult time. While you may feel in control of these decisions, having a professional advisor to collaborate with can provide some assurance. This professional can give strategic advice on which accounts to tap with least penalties.
Some planners charge on an hourly basis. If you currently have a financial adviser or you have substantial assets with a mutual fund company through your 401K plan perhaps you qualify for free advice.
Help! I Can’t Pay my Bills, Sally Herigstad the National Foundation for Credit Counseling
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