Story last updated at 3/11/2009 - 10:58 am
If you've ever been laid off from a job, you know how paralyzing it can be to worry about what to do next. Because you may not find a new position right away - especially in this economy - here are several steps you should take immediately to protect yourself financially:
Investigate severance benefits. Although your employer isn't obligated to provide severance benefits unless they're part of an employment agreement, it doesn't hurt to ask. It's wise to know your company's severance policies in advance as a basis for negotiations.
Severance benefits may include the following:
Severance pay, usually based on your annual pay and years of service.
Temporary use of company resources, such as office space or equipment.
Outplacement counseling, which may include assistance with resume writing, interview skills development and job searches.
Extended health care coverage or help paying COBRA insurance premiums.
Apply for unemployment benefits. Depending on your length of employment and other factors, you may qualify for unemployment insurance payments. There's usually a waiting period based on when you file, not when you lose your job, so apply immediately. Visit the Department of Labor's CareerOneStop website for more details (www.careeronestop.org).
Cut spending. Unless you've amassed sizeable emergency savings, you may run short on cash and have difficulty paying bills before finding a new job. Analyze your budget carefully and track all expenses, looking for non-essentials to trim (unnecessary vehicles, eating out, cable TV, new clothes, etc.)
Manage your bills. Ordinarily, making extra mortgage, loan and credit card payments is a great financial strategy, but if you're facing unemployment, it may make sense to scale back payments to boost your available savings to pay bills. (However, always make at least minimum payments - on time - or risk damaging your credit score.)
Seek additional income. Consider money-making ventures like renting out a spare room, selling unneeded items or taking a part-time job. However, be aware that part-time job income could impact your unemployment benefits, so check the rules carefully.
Protect your 401(k). You have several options for your 401(k) balance after a layoff:
If allowed, leave it in your former employer's plan (although, if it's less than $5,000, you may be required to close the account).
Roll it over into a new employer's plan, if it has one.
Roll it over into a regular or Roth IRA (with a Roth, you'll pay income tax on the amount when filing this year's taxes; however, you won't be taxed on subsequent earnings at retirement).
Take a lump-sum cash payout.
Although the last option may sound tempting, especially if you're short on cash, it's almost never a good idea. Not only will you significantly reduce your retirement savings, but you'll face severe tax consequences: You'll owe federal (and possibly state) income tax on the amount, plus a 10 percent early withdrawal penalty unless you're over age 55 or disabled.
Also note that outstanding loans against your 401(k) must be repaid, usually within 30 days, or you'll face paying taxes and an early distribution penalty if you're under age 59. To learn more about the financial consequences of 401(k) distributions, you should probably consult a financial professional.
Another good source of 401(k) information is Practical Money Skills for Life, Visa Inc.'s free personal financial management site (www.practicalmoneyskills.com/benefits). The site also has tips on what to do if you lose your job or encounter other unexpected life events (www.practicalmoneyskills.com/unexpected).
Jason Alderman directs Visa's financial education programs. To sign up for a free monthly personal finance e-Newsletter, visit practicalmoneyskills.com/newsletter.