What to do if you think you might lose your job

If you’ve been following the news lately, you may be worried about your job.

The latest report of the US Bureau of Labor Statistics showed that employers significantly slowed down their hiring in July, adding about 35% fewer jobs than forecast. The unemployment rate also rose to 4.3%, a level not seen since October 2021. And while the unemployment rate is still considered low by historical standards, there is a lot of concern about what the economy is going to do next.

If you’re worried about what all this means for your job and your finances, try not to panic. Follow these steps to prepare for a worst-case scenario, like a job loss or a recession.

Understand your HR benefits

Whether you’ve recently gotten the bad news that your position has been eliminated or you’re bracing yourself for a worst-case scenario, it’s essential to understand what benefits you may be entitled to. Here are a few types of benefits you can ask your HR department about.

Unemployment benefits

If you get fired—meaning you lose your job through no fault of your own—you are usually eligible for unemployment benefits, though the rules vary by state. You typically file for benefits in the state where you worked.

Contact your the state employment office immediately after you are notified that your job has been eliminated. You can expect to wait approximately two to three weeks from the time you file your application until you receive your first unemployment benefit payment.

Severance pay

Some employers offer terminated employees a severance package as compensation when their position is eliminated. A severance package may include some or all of the following components:

• One-time payment. The amount varies by employer, but a common formula is one or two weeks’ pay for each year of employment. Each payment is taxable as ordinary income.
• Payment for unused paid time off, including vacation and sick leave. In some (but not all) states, employers must pay their employees for unused PTO if they leave their job for any reason.
• Expansion of employer-sponsored health insurance. Some employers allow you to keep your medical, dental, and vision coverage for a certain period of time at no additional cost.
• Possibility to retain some of the company equipment. If you have a company laptop or mobile phone, you may be allowed to keep it or purchase it at a reduced rate.
• Additional benefits. Some companies help laid-off employees find new jobs by offering career counseling or help with resume writing.

Companies are not required to offer severance packages, but if they do, one of the main reasons is to avoid lawsuits. So if you accept a severance package, you will likely have to sign an agreement stating that you will not sue your former employer.

Health insurance

Even if you aren’t offered comprehensive health care benefits as part of a severance agreement, you often have the option to extend your work-related coverage for you and your dependents. A federal law called the Consolidated Omnibus Budget Reconciliation Act, or COBRA, allows employees who leave their jobs to continue their health insurance if their company has 20 or more employees. Depending on the circumstances, coverage can typically last 18 to 36 months.

The catch is that you typically pay the full premium, plus a 2% surcharge. Since the typical workplace pays more than 80% of the health insurance premiums for current employees, COBRA can be expensive if you’ve just lost your job.

Another option is to shop for a plan on the Health Insurance Marketplace. If you lose your work-related coverage, you qualify for a special enrollment period under the Affordable Care Act, which means you can buy a plan outside of regular open enrollment. However, you must do so within 60 days of losing coverage.

Create a basic budget

A bare-bones budget is a no-nonsense budget that only covers essential expenses. You can create one so that you have a plan of action in case you lose your job. Or if you’re low on savings, you can implement a bare-bones budget now so that you have a safety net if your income takes a hit.

When you draw up a limited budget, the following expenses are considered necessary:

• Mortgage or rent payments
• Car payments
• Utilities
• Minimum payments on other loans and credit cards (to avoid damaging your credit score)
• Medical care (including health insurance and medicines)
• Groceries
• Pet costs (including food and veterinary care)
• Car insurance
• Basic internet and cell phone service

The following expenses are generally considered non-essential and do not belong in a tight budget:

• Debt payments above the minimum due
• Cable packages
• Streaming services, such as Netflix and Hulu
• Gym memberships
• Eating out
• Saving for a vacation

Some categories aren’t so clear-cut, however. For example, childcare may be essential while you’re still working, but you may be able to cut it out of your budget if you lose your job. It’s usually a must to contribute at least enough to get your employer’s matching contribution for a retirement account. But since accounts like a 401(k) or 403(b) are employer-sponsored, you wouldn’t be contributing to these accounts if you lost your job.

You can also reach a hardship agreement with your creditors if you lose your job. For example, some credit card companies will let you make lower payments or agree to waive late fees and other charges if your income is disrupted. But if you’re still working, this probably isn’t an option.

A budgeting app can help you find expenses you can eliminate. You can also look for ways to save money on necessities, such as shopping at discount grocery stores or asking your utility company about payment assistance programs.

Build your emergency fund

If you can find areas to save in your budget, make building your emergency fund a top priority. A high-yield savings account is a smart place to stash your emergency fund. Not only can you make a lot of money with your savings, but you can also access your money without penalty.

Don’t panic and liquidate your retirement accounts

It can be painful to watch your 401(k) balance plummet. But the worst thing you can do is panic and withdraw from your 401(k) or other retirement account.

Withdrawing your 401(k) pension early is generally a bad idea, for two reasons:

• You don’t give your money time to recover from a stock market downturn.
• You may have a 10% penalty for early withdrawal if you are under 59 ½, in addition to income tax.

Ups and downs are a normal part of investing. Predicting the timing of a recovery can be tricky, but staying the course has proven to be the best option for most investors.

Pay off debts if you can

If you have debt that you can pay off now, it can free up some room in your budget if you temporarily lose your paycheck. Two debt payoff methods to consider are the debt snowball and the debt avalanche:

• Debt snowball: You make minimum payments on all debts except the debt with the smallest balance. Put all your extra money into the smallest debt. Once you pay off that debt, put your excess money into the next smallest balance.
• Debt avalanche: You make minimum payments on all debts, but you put extra money into the debt with the highest interest rate. Once you pay off that debt, you move on to the debt with the next highest interest rate.

Perhaps the bigger question is: Should I save first or pay off debt? There is no right answer to that question. A good approach is to divide the money you have left in your budget between emergency savings and paying off high-interest debt, such as credit card debt.

Consider alternative sources of income

If you are worried about losing your job, it may be time to look for alternative sources of income. That may mean updating your resume and LinkedIn profile so you can apply for other jobs.

You can also look for other sources of income by getting a side hustle. Your options here are pretty much endless: you can start a side hustle, take on freelance work, find an app-based gig (like driving for Uber, delivering groceries for Instacart, or walking dogs for Rover). Or you can start even smaller by selling your old stuff on apps like Poshmark.

Even if you’re not worried about losing your job, it’s a good idea to review your options for making money every now and then. Finding additional sources of income can help you save money and pay off debt faster. And by regularly updating your resume and applying for jobs, you can find a higher-paying job.