7 ways to prepare your finances for unemploymentAug 20, 2021
Unemployment is stressful. That’s putting it lightly. And while you can’t usually avoid the emotional stress that accompanies a job loss, there are steps you can take to reduce some of the financial stress. The key is to plan ahead as much as possible. Whether you work in a sector where cutbacks are common or you’re certain that your job is secure, it’s best to prepare for the worst-case scenario. These seven steps can help safeguard your finances when your household income takes a hit.
1. Review your budget to prepare for unemployment
Reviewing your budget begins with asking yourself a few simple questions about your existing finances. Are you living paycheque to paycheque or beyond your means? Do you regularly set aside savings for short and long-term goals? Are you able to keep up with your debt payments or has your debt become unmanageable? Now is the time – before you have experienced a job loss – to take a detailed and honest look at your budget. Weigh your needs vs your wants. If you can, trim any spending on those nice-to-have items or experiences that you can do without, even in the short-term.
2. Reduce your debts
If you are employed and your debt load is manageable, try to increase your monthly payments. Putting a plan in place to deal with debt on your own can help. Or, if you have several higher interest credit card balances, consider debt consolidation to combine your debts into one loan at a lower interest rate. If your debt is unmanageable or you’re worried about your ability to keep up with debt payments after a job loss, your best course of action is to seek professional help. A Licensed Insolvency Trustee will review your situation, and explain all available debt relief options and help you find the best solution to manage your debt.
3. Consider refinancing your mortgage
If refinancing your mortgage could save you money, it’s worth contacting your lender to determine if it’s a viable option. Reducing your mortgage payments could mean extra money each month for savings, debt repayment or an emergency fund. For emergency purposes only, now is also the time to obtain pre-approval for a home equity line of credit. Approval will likely be easier when you are employed. However, it’s important to understand that using a line of credit to cover living expenses should be a short-term solution. Relying on credit to pay your bills could cause you to take on more debt than you can manage.
4. Contact your creditors
With certain creditors, particularly credit card companies, you might be able to negotiate a lower interest rate on your debt. If you’ve been keeping up with your minimum payments and you’re feeling uncertain about your financial future, calmly explain how you are dealing with unemployment and ask for an interest rate reduction. You can also inquire with your credit card company about temporary relief options. They may be willing to lower your payments or allow you to skip payments in the short term.
5. Stock your emergency fund
While paying off debt should be a priority when you’re preparing for a potential job loss, it’s also important to set aside money for emergency expenses if you can. The last year-and-a-half has put many Canadian households in crisis mode. A well-stocked emergency fund can supplement your Employment Insurance (EI) benefits and help you stay afloat while you are searching for work.
It’s best to start saving when you’re on solid financial footing. Financial advisors typically recommend that you have three to six months’ worth of expenses set aside. But, even 50 to 100 dollars a month can add up over time. That end goal might seem impossible right now but start small and build as you can.
6. Check your company benefits
While you are employed, make sure you are regularly accessing your company’s health benefits. Keep up with regular prescription refills and dental appointments. If your employee health coverage includes a portion of the cost for prescription eyewear or visits to a physiotherapist or chiropractor, now is the time to schedule any necessary appointments. Taking advantage of your employee benefits now could mean less financial stress if you find yourself facing an unexpected job loss.
7. Stress test your finances
Finally, one way to prepare for living on less in the future is to practice living on less now. Estimate what your household income would look like in the event of a job loss or layoff. Try to stick to that estimated income by trimming spending in all areas of your budget, but especially on those “nice-to-haves”. Bank any dollars you save each month. Cutting back before you actually need to allows you to address any difficulties ahead of time.
Are you concerned that unemployment will make it hard for you to manage your debt? Meet with a BDO Licensed Insolvency Trustee to review your situation and explore your options for debt relief.