The latest numbers from the government indicate the median length of unemployment is 5 1/2 months. Going without a paycheck for this amount of time can do considerable damage to your financial well-being. If you had an emergency fund, it is depleted, if not completely gone; otherwise, the only way to cover your shortfall is to either increase your credit card balances substantially, or cash in your investments, or both.
What About Your Retirement Funds?
Hopefully you didn't have to go into your retirement funds. If you received money from a deferred account (one to which you contributed on a pre-tax basis) you paid income taxes on the distributed amount plus a 10% penalty. Not only is that money not available for retirement, it's not earning for you on a tax-deferred basis. It's important that this be replenished, as we will discuss later.
Oh Boy, Now That I Have a Job, I Can Go Back To My Old Standard of Living!
Not so fast, newly employed person. These days, if you're lucky enough to have a job, the chances are you're not getting paid what you were; you may have taken as much as a 20% cut in pay in order to take a job. Most people who just landed a job after being unemployed are reminded of what it was like without a paycheck, and although they now have an income, they're wisely living a more spartan lifestyle so they won't be back in the same bad situation should they lose this job.
It's tough not to splurge because you've done without for so long.
The Six Tricks to Get Back on the Right Path After Getting Fired
Create a new budget; start with your new income. This is a great time you live below your means.
- Reload your emergency fund. If you didn't have one to begin with, this is a great time to start one. Without one, you'll just go deeper in debt when the next unexpected event arises.
- Pay off credit cards. This should be done at the same time you reload your emergency fund.
- Save for retirement. This really needs to be done if you had to make distributions from your retirement fund. If your new employer has a 401(k) with a match, make sure you contribute to receive the full match; that's free money. If you're 50 years old and above, you can contribute an extra $5,500 for a total of $22,000 in 2011.
- A line of credit. I wouldn't suggest this, but the only time to receive a line is when you have a job. So, now that you have one, and you think you might need one, you might want to contemplate a line of credit. You only pay interest on the line of credit when you begin to draw it down.
- Get your credit reports. Experian, Equifax and TransUnion will give you one once per year. It's important to know what happened to your credit during your time of unemployment.
- Don't splurge. As said earlier, this is difficult when you've done without for so long.
Would it be difficult for you to keep a frugal lifestyle when you land a job after being unemployed for a while?