Where Will the Income Come From?

The Economic Stages of Unemployment

There are different economic stages of unemployment, based upon potential sources of income. When does unemployment actually begin? It begins when your employer gives you notice. Although you may have a few weeks before you're actually unemployed, you need to take action right away.

The Notice Period

Your employer tells you that as of a certain date you no longer have a job. For example, your employer tells you that you will be out of a job the first day of next month. Although you are still going to work until that time, your career transition has now officially begun. Begin your financial planning immediately. Since you will be receiving your regular paycheck during this period, your income is largely unaffected. However, you should immediately reduce your spending (see the section Reducing Your Expenses).

If you have been given a lengthy notice period, you may consider one or more of the following:

  • Once you've reviewed your net worth and understand your financial position, you may determine that your emergency fund is woefully inadequate. You need to immediately do what you can to fix that. If you've evaluated your anticipated cash flow and can't find enough ways to reduce your spending and increase your savings before your employment ends, it may be necessary to consider eliminating your 401(k) or pension contribution. Although long-term planning for your retirement is always a top priority, your short-term cash needs are paramount. If your employer pays out for unused vacation, consider this in your calculations.
  • Reduce any voluntary payroll deductions, such as charitable contributions. You can always make up any contributions once you are re-employed.
  • If you're really trying to squeeze a few extra bucks out of your take-home pay, you could reduce your tax withholding. You may have already paid enough taxes for the year. But remember, if you go on to receive unemployment, you'll have to pay taxes on the benefits received. So you may just have to allow for greater withholding than usual when you get your next job to make up for any deficiencies if necessary. Proceed with caution on this one.
  • Make sure you understand the terms of your employment loss and that you receive everything to which you are entitled.

IMPORTANT NOTE: Although you are allowed to reduce the amount of withholding tax you pay, under-withholding not only results in a larger tax bill at tax time, but you may also be subject to additional fines and penalties.

Severance Pay

You may be fortunate enough to receive severance pay. Typically, the amount of severance pay you receive—if any—is based upon your years of service with your employer. For example, you may receive one week of pay for every year of service. If you've worked for your employer ten years, you could, as an example, receive ten weeks' pay. Oftentimes, your employer will give you the option of receiving your severance pay in a lump sum or paid out according to the regular payroll schedule.

IMPORTANT NOTE: Even though you may choose to take your severance pay as a lump sum, you may need it for future expenses, regardless of your current financial position. Ideally, it would be great if you were stepping right into a new job and you could just invest the money or use it for a major purchase. Since your career transition may take some time, you may want to deposit the money in a money market fund or similar cash account until your employment situation stabilizes.

SUGGESTION: The length of your notice period and the amount of money you receive may be negotiable. Requesting an extended notice period can often be a win-win situation for employer and employee. It never hurts to ask whether extending your employment or additional severance pay is an option. After all, the worst that can happen is that your employer says no. Note that an extension of employment will postpone your eligibility for unemployment benefits.

Unemployment Insurance

One of the first places you should plan to visit when you are given notice is the unemployment office. The office locations can be found in the state government section of the telephone book. Your state's Web site will have comprehensive information on the state's unemployment insurance program. Even if you are not immediately eligible for unemployment compensation, look into it right away and find out what you'll need to do.

The most important thing is to get the paperwork started as soon as possible. It often takes several weeks before your claim is processed and your first check arrives. At the same time, you can schedule an unemployment benefits orientation session. This session will describe the conditions and procedures for collecting unemployment, as well as other services that may be of help in your job search. Finally, you may be able to obtain an estimate of your future unemployment payments. This will help in your financial planning. You may be able to apply by phone or via the Internet, so check out your state's Web site for application procedures.

Other State and Federal Aid

Many of us have never had to rely upon anyone else for assistance, but it is nice to know that help is there if you really need it.

You may be eligible for food stamps or other programs, depending upon your financial circumstances. In order to determine if you are eligible for any state or federal financial assistance, contact your county or state department of human services. Counselors will be able to inform you of their agency's services and direct you to other service providers if necessary. Again, these telephone numbers can be found in the state listings of your local telephone directory, and you can generally find the information on your state's Web site.
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