Losing a job is a Titanic-level catastrophe. If you’re financially prepared, then you’re one of the lucky ones who get dibs on a lifeboat. But, if you haven’t been planning, you might as well be Rose Dawson...all you’ve got is a floating door and Leonard DiCaprio’s dreamy (albeit cold) face to look forward to.
Just like the passengers on the Titanic didn’t think it was possible for the ship to sink, most people don’t think they’ll lose their jobs. But no one can predict what lies ahead or when an economic iceberg will appear out of nowhere. Which is why it’s essential that you start building your lifeboat today.
But, before you start socking money away, you should know the four biggest myths about planning for unemployed, so you save enough before you need it.
Myth #1: Public unemployment insurance will save the day
The biggest misconception people have about getting laid off is that they can just collect public unemployment insurance and be “funemployed” for a while. They envision unemployment as a welcome break from the grind- a time to enjoy afternoon lattes at their favorite cafe, catch up with friends over lunch, and fill their time with new hobbies.
The truth is, if you’re relying on public unemployment insurance alone, you’re not going to have money to do any of those things. For the average person, federal unemployment insurance only covers half of their full-time wages.
Instead of mornings spent at fitness boot camp, you’ll be at your own budgeting boot camp as you try to figure out how to pay your rent or mortgage, keep the lights on, and cover this week’s grocery bill.
Myth #2: You can use your emergency fund to bail you out
You might be thinking, “But I have three months of expenses saved in my emergency fund. I’ll be fine.” And maybe you will be, but keep in mind that getting laid off is just one type of emergency. What happens if your roof needs to be replaced, your kid breaks their arm, or your car won’t start?
You’re probably planning on using your emergency fund for these expenses, too. Which is why you can’t assume that your emergency fund will be fully funded or even available if you’re laid off.
People often confuse an emergency fund with an unemployment fund. An emergency fund is savings for all of life’s unknowns. An unemployment fund is savings just for unemployment. You don’t dip into your unemployment fund if the roof springs a leak.
Myth #3: If you need to, you can just reduce your expenses
While all of us believe that we could be a budgeting wizard in a pinch, the truth is that reducing our spending is way harder than we think. You’ve probably noticed that when you make more money, you spend more, known as lifestyle creep.
Lifestyle creep is when your standards of living increase as your income rises. Things that were once luxuries become necessities. The most dangerous part of lifestyle creep is that it occurs slowly, over time, so all those extra expenses become embedded in your daily routine.
It’s going to be way harder to cut out your weekly massage and daily yoga class than you think and you’re probably being overly optimistic about how much you can live without.
Even if you can cut down your expenses, unemployment comes with its own costs, like health insurance. While COBRA coverage ensures that you remain on your group health insurance plan, you’ll be footing the bill yourself.
Even if you reduce your monthly expenses by $500, if you have to pay $600 a month for health insurance, you’re still spending more while earning less.
Myth #4: You’ll only need to plan for a few months of unemployment
There’s one thing that all of my unemployed friends had in common: it took them longer to find a job than they anticipated. What they found is that, in the hiring process, their priorities shifted from finding something quickly to finding something that was the right fit.
Staying unemployed longer did work out because all of my friends found jobs that they loved. But, there was a financial price to pay, since many were unemployed two or three months longer than they thought.
Also, most public unemployment insurance programs require that you’re willing to accept a job if it’s offered to you. You also must be willing to commute a reasonable distance and accept a wage that’s typical for your industry.
If you aren’t willing to meet these terms than your public unemployment insurance could be jeopardized. Which means you might have to trade your unemployment checks for the time you need to search for your dream job.
How to plan for unemployment:
If you’ve fallen for one of these myths, don’t worry! Now that you know the truth about planning for unemployment, you can start making a solid financial plan. Here are three ways to get started:
1) Start building an unemployment fund: This isn’t an invitation to blow off your emergency fund, but rather to create a secondary savings account just for unemployment. If your employer is a partner, they can contribute to your savings too! Check out this article on three ways to jumpstart your unemployment fund.
Services like Otherhood provide a monthly income that’s based on your household expenses and plan. Every month, payment is direct deposited into your bank account, just like a paycheck. Unlike public unemployment insurance, you aren’t required to be on the job hunt or accept work if it’s offered to you, which gives you more flexibility to stay unemployed longer.
2) Reduce your monthly expenses now: You’re probably spending money on stuff that you don’t use. Go through several months of bank statements and highlight anything that you can cut from your monthly budget. Be honest with yourself about these costs and where you are right now. Often we hold onto expenses because they represent an aspirational version of ourselves. If it doesn’t fit into your current lifestyle, ditch it.
What should you do with the money you save? Redirect it into your unemployment fund!
3) Invest in private unemployment insurance: Sometimes, saving and cutting down expenses still isn’t enough to get us where we need to be. If you want additional financial peace of mind, consider private unemployment insurance.
Implementing one or more of these strategies will prepare you for whatever lies ahead. If you ever are unemployed, you’ll have enough money coming in to cover all of your expenses, stress free. That’s enough to make you want to climb onto the edge of a ship, spread your arms, and yell, “I’m king of the world!” until you’re kindly escorted off by security.