Preparing financially for hard times - emergency fund building, contingency budgeting - Brief Article

USA Today (Society for the Advancement of Education), July, 1997

Layoffs remain a hard fact of life for many employees, even in good times. You may not be able to avoid receiving a pink slip, but there is plenty you can do to prepare financially for one, suggests the institute of Certified Financial Planners, Denver, Colo.

Build an emergency fund. Squirrel away at least three months' worth of cash reserves to cover bare-bones living expenses. If you really are worried about your job or a shaky industry, put away six months. That's tough to do, but this will be your single most valuable cushion in the event you are laid off. Don't count heavily on severance pay. You may get little, or income taxes may eat deeply into it. Keep the bulk of the cash in a bank account or money market, but if you are reserving for a longer time, you might put some money in short-term CDs or Treasury bills, which usually earn a higher return.

Reduce debt. This is a good idea even when things are going well, but especially important should you lose your job or be forced to take a position that pays less. Pay off your credit cards. Consider refinancing your home to lower house payments. It might be wise to arrange (but not use) a home-equity line of credit before you lose your job since you probably won't be able to get one after you are laid off.

Budget. Again, this is a good idea even under the best of financial circumstances. If you are worried about your job, cutting expenses now will cushion the blow if it comes and give you extra income to stash in that emergency fund. Look closely at eating out, clothes, and entertainment. Consider postponing large-ticket plans such as an expensive family vacation. Run a cash-flow budget for two or three months to spot where money (especially cash) is slipping into the cracks. Design a contingency budget should you be laid off. What is the minimum you could subsist on until you found a new job?

Plan ahead. Stay tuned to the corporate grapevine. Try to get a sense not only of your chances of a layoff, but what kinds of severance or early retirement packages are being offered. You may have choices to make when the time comes, and the more prepared you are, the smarter decisions you can make.

For instance, you may have the option of taking either a lump sum or monthly payouts of severance pay. With a lump sum, you could get hit hard with taxes, especially if it is sizable or you are laid off toward the end of the year. (Six months of pay, for example, plus nearly a full year of salary could bump you up to a higher tax bracket.) In addition, payment for accumulated sick leave and vacation is taxable, as are unemployment benefits. Nevertheless, a lump sum may be a desirable choice if you need the funds to help start your own business. Taking severance pay in installment plans, though, not only may ease the tax burden, but allow you to continue your health coverage (perhaps subsidized by the employer). Early retirement packages may offer some flexibility, so carefully consider any buyout options.

You probably will need to make decisions about what to do with your retirement plan: leave it with the employer; take a distribution and pay taxes on it; roll it over into an individual retirement account or, if you have another job lined up, into that employer's retirement plan. If it is a traditional pension, you will have to decide whether to start taking the pension now and, if so, in what form, or try to hold off so you can receive larger payments later.

Look for other sources of income. Consider taking a part-time job or renting out your vacation home to generate extra income to stow away in the emergency fund.

Keep up your job skills -- or learn new ones. The more up-to-date or varied your job skills, the more likely you will be able to find new work if you are laid off.