Individuals experiencing a sudden change in their employment may face many challenging options related to their personal finances. Monthly bills, discretionary spending and current debt are just a few of the items that may require attention with this life shift. It’s important to understand that decisions made during this period can have a lasting impact on long-term financial health and should be carefully evaluated to avoid common mistakes.
A few best practices to keep in mind during these transitional periods include:
Plan first, act later
It may be tempting to make immediate decisions while emotions are high. Do your best to refrain from falling into this trap. Panicked or snap decisions can compound challenges, resulting in even higher stress and anxiety. Take time to carefully evaluate your situation, and create a plan for responding to short, intermediate and long-term decisions. You may have spent years positively positioning your finances—don’t risk destroying it in a fraction of that time.
Prioritize financial considerations
Next, create a budget to evaluate your financial obligations and track your spending. This process will help establish financial priorities and identify opportunities for reducing expenses. For those who haven’t done this before, there are typically a few immediate opportunities for reduced spending. And while this might seem painful at first, it’s important to remember that these don’t have to be permanent changes. Temporary adjustments in areas such as dining out and entertainment may be missed luxuries, but eliminating these for at least the short-term can have a big impact on your monthly budget.
Maintain your emergency savings
It is critical to maintain an emergency savings plan for other unplanned expenses. Obtaining additional credit lines during a transitional period can be difficult, so carefully managing your rainy day fund is extremely important. Also, leverage the opportunities identified in your budgeting process to help meet some of your financial commitments. Reducing extra payments on credit cards, student loans, car loans or mortgages also will help extend your savings.
Re-evaluate your risk tolerance
When faced with a disruption in your income, it is important to reevaluate your capacity for risk with your investments, as you may need a more predictable secondary source of assets. Increasing the allocation of a portion of your investments to more conservative positions may be required.
Don’t touch your retirement funds
Tapping retirement plans for immediate liquidity is very tempting, but this should be avoided if at all possible. You can lose 20 to 40 percent off the top to federal and state taxes and may be subject to premature distribution penalties. In addition to these significant upfront costs, you will lose the tax-deferral and potential for future growth on these investments. When it comes to access, retirement accounts should be a “fund it and forget it” type of asset.
Experiencing an unforeseen job change is an extremely stressful and challenging life event. Minimize financial stress and worry by conducting a thorough and honest review of your budget or talking with a trusted advisor. Understanding your full financial picture will help strategically position you for today and tomorrow.
John Leis is Vice President of Personal Financial Solution for American Century Investments. He may be reached at 816-340-4271 or firstname.lastname@example.org.