How to Deal with Layoffs and Income Reductions

If your budget is tight, even a slight reduction in income can be devastating. If you're faced with an income reduction, whether it's a loss in overtime or a layoff, you'll need to make some adjustments to your lifestyle. Here are some tips to help you through it.

Have a financial cushion to be prepared for an income reduction!

Many people have been confronted with an unpredictable loss of income due to the recent trend toward the outsourcing of company workforces. Layoffs are but one obstacle employees face. Companies are also cutting back on overtime, which can cause a profound reduction in income. Even if you are lucky enough to avoid a layoff, think about the effect a cut in overtime pay, a pay freeze, or reduction in any other expected income might have on your family's budget. Following are some tips to help you cope if you are faced with one of these situations.

• If you lack a financial cushion for emergencies, try to squeeze some extra funds out of your current cash flow to establish a crisis budget. It has long been recommended that people set aside the equivalent of three to six months' worth of wages to carry them through a crisis.
• Consider temporarily reducing payroll deductions for savings bonds, company stock or even retirement plans to build personal savings.
• Plan to pay off any 401(k) loans that are outstanding. If you lose your job you will be required to pay back any 401(k) loans rather quickly, possibly within just a few weeks. If you don't do it on time, the government considers it an early withdrawal and will require that you pay taxes and penalties on the loan.
• Review employment benefits, including medical, dental coverage and life insurance. Take care of necessary annual checkups and examinations while you're still covered.
• Dual-income couples should look into moving the entire family to one spouse's plan.
• Ask your Human Resources Department what the cost would be to continue health care coverage under COBRA rules. COBRA is a 1986 law that entitles former workers to continue participating in group plans for up to 18 months after termination. The worker, however, must pay for the coverage, which could be as much as $500 or more per month.

If you do become unemployed, take action!

• If you have children in college or in a private school, contact the financial aid office and inform them of your layoff. They may provide emergency financial aid so that your child's education will not have to suffer.
• Don't start selling stock, taking out loans or tapping retirement savings. There are hefty penalties for withdrawing money early from retirement accounts. You should do this only in extreme need.
• If you have stock options, ask your employer about the rights you retain to exercise them.
• Be sure you fully understand the terms of any severance package, including the terms of any medical benefits continuation. Sign up for COBRA and unemployment benefits if appropriate.
• Take advantage of career counseling or job placement services. In addition to advice, they may provide money-saving services like resume preparation or the use of computer resources. There are also many online job services that you may consider using.
• Your priorities should be shelter, utilities, food and transportation, in that order!

Your mortgage should be your first priority because delinquent payments can cause huge problems. Not only do you risk losing your home, you jeopardize your credit rating. If you rent, you may get a bit more leeway from landlords, but you should still give this payment precedence. Be aware that foreclosure proceedings can start after as few as two missed mortgage payments. Ask your mortgage lender about forbearance, a form of short-term relief that may allow you to make lower payments.

Utility companies may offer budget plans, installment programs or other accommodations. If you need to, contact the Salvation Army, the United Way and other social service agencies for help with food and clothing. Lower-income women who are pregnant, nursing or who have children under the age of five may qualify for WIC, a Department of Agriculture nutrition program that provides milk, cereal, cheese, and other food items.

Auto finance companies and credit unions may allow hardship cases to defer a payment on an auto loan or lease. Interest will continue to accrue, however, and some lenders may charge an extra fee for this option.

As always, the best offense is a good defense. Start planning your contingency fund before you are faced with situations that reduce or eliminate your income.