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Laid Off and Worried About Money: What to Do Next?

Key Points
  • Hard-working and responsible Americans are suddenly finding themselves in a financial crunch they could never have imagined only a few months ago.

  • If you've lost your job, there are concrete steps you can take right away to take advantage of both state and federal assistance programs.

  • Focus on what you can control in the present but also protect your future.

Dear Carrie,

I'm a single parent with two middle-school age kids and was just laid off because COVID-19 regulations forced my employer to shut down. I'm worried I may be out of work for a while. I received a small severance and have a 401(k), but that’s about it. What’s the best way to get through the next few months? Can I draw money from my 401(k)? What about health insurance?

–A Reader

 

Dear Reader, 

As I said in a recent column about getting through tough financial times, the current crisis is impacting millions of hard-working and responsible Americans who suddenly find themselves in a financial crunch they could never have imagined only a few months ago.

My heart goes out to every one of you, especially those of you who are single parents.  But although things can feel like they're spinning out of control now, the key is to stay positive and take action. Here are some concrete steps you can take right away to help you both financially and emotionally.

File for unemployment

If you haven’t already, do it now. The state you live in and the amount you made over the past year will determine how much you get. It won't replace your entire paycheck, but can certainly help. Also, the federal government has increased benefits due to COVID-19, by adding an extra $600/week for up to four months. Check with your state for details. Careeronestop.org is a good resource for unemployment updates and linking to your state's unemployment insurance website.

Look into COBRA

If you work for a company with at least 20 employees, you may be able to continue your group health insurance through COBRA for up to 18 months. The catch is that premiums can be a lot higher than you paid as an employee.

Contact the benefits department at your previous employer and get the facts including the cost and the process for making the switch. Then do some comparison-shopping before you elect COBRA. You may be able to find a lower-cost policy through your state's or the federal ACA exchange at healthcare.gov. You may qualify for a Special Enrollment Period if you lose health coverage through your employer or the employer of a family member.

Whatever you do, health insurance is a must for you and your children. You don't want an illness or injury to jeopardize you or your family—especially now.

Do some careful personal accounting

With a reduction in income, it's more important than ever to get a handle on your expenses. Here's what I suggest you do first:

  • Focus on essentials—List what you spend on your mortgage or rent, utilities, phone/internet, groceries, insurance premiums, debt payments—anything you have to pay each month. This will help you decide where you can most easily cut back for a while. 
  • Prioritize your debts—Debts can't be ignored, but they can be prioritized. Once you have your essentials covered, consider temporarily paying only the minimum on mortgage/rent, car loans, student loans and credit cards. Be proactive and contact creditors if you’re struggling before they reach out to you.
  • Look at your budget in light of your resources. With this information in front of you, calculate how much money you have on hand and how long you can get by. Include your severance, unemployment benefits, child-support if you get it, and any emergency savings. Don't forget to include the stimulus payment you may qualify for under the recently passed economic relief plan.

Review your 401(k) options

I’m glad you mentioned having 401(k) savings, because that will be a very valuable resource down the road. You basically have four options:

  1. Leave the 401(k) with your employer plan.
  2. Roll over to a new employer.
  3. Roll over to an IRA.
  4. Withdraw or cash out the 401(k).

It’s important to understand differences in fees, taxes and risks with all options. Discuss your situation with a tax and financial advisor if you need more help.

Be careful about taking a 401(k) withdrawal

Your present situation may be difficult, but you still have to protect your future. While your 401(k) could be a resource if you remain unemployed for a long time, I suggest using it only when absolutely necessary.

On the positive side, new rules under the CARES Act allow you to take an early distribution of up to $100,000 from a retirement account in 2020 penalty-free, as long as it's related to the coronavirus. Taxes on withdrawals can also be spread out over three years. Plus, you can avoid the taxes entirely if you pay back the distribution within three years. Discuss this option with a tax advisor before you make a decision.

Even so, if you have any other sources of cash, for instance a HELOC if you own your home, you may want to explore those options first.  

Check into other forms of assistance

From mortgage forbearance to eviction protection to utilities not cutting off services for nonpayment, there are a number of ways to get some economic relief during these difficult times. Don't hesitate to check into—and take advantage—of them. Talk to your mortgage lender or landlord, contact your phone, internet and utilities service providers. Now, more than ever, people are willing to help.

Include your kids as you look to the future

If you haven't talked openly to your kids about your new economic reality, now's the time. In fact, at their ages, they can be part of the solution. Get their ideas on how you could all cut back. What are some things they're willing to postpone until you're working again? If you include them in the process, they'll be less resistant—and perhaps you'll all be less anxious as you get through these next few months together.

And then, once you’re back on an even keel, it will be time to revisit your long-term planning and saving, including building a several month cash reserve for the next emergency. In the meantime, take advantage of all the resources available to you, and prioritize all of your spending. Focus on what you can control as you care for yourself and your children. Together, you'll find your way to a brighter future.

 

Have a personal finance question? Email us at askcarrie@schwab.com. Carrie cannot respond to questions directly, but your topic may be considered for a future article. For Schwab account questions and general inquiries, contact Schwab.

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The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. 

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