Losing a job can be a stressful and challenging experience. Not only does it take a toll on your emotional well-being, but it can also have a significant impact on your finances. It’s easy to feel overwhelmed and unsure of what to do next. However, it’s essential to stay focused and avoid making financial mistakes that could further worsen your situation.
I have seen many of my clients go through this experience in the last few years. Though Financially we (they) were prepared for such kind of emergency situations, we still did some tweaking in the financial arrangements to manage this crisis well. Still, the stress level of the person going through this situation cannot be quantified.
These days also you will read about many IT companies including the giant ones- Twitter, Amazon, Google, Meta ( Facebook) and the likes are laying off employees due to the recession in the western world.
In the last few days, I have been receiving some questions from readers who have lost their jobs or are anticipating a job loss scenario.
I found a common behavior in all the questions. They are seeking for short term ease even if that results in long term pain. Just like the way they see their investments.
So, I decided to write an article to cover some of the mistakes which anyone who is into this stressful job loss situation must avoid and better focus on the new job search or creating an alternate source of income.
Job loss scenario: Critical mistakes to avoid
Lacking an adequate emergency fund/ not using it efficiently:
Not having the safety cushion of an emergency fund to fall back upon can be disastrous in this ill-fated circumstance. It might lead you to take further high-interest loans or swiping of credit cards to meet your expenses. This might make things worse, if the job loss scenario gets a prolonged extension.
If you are anticipating a job loss and have not provisioned for an emergency fund covering at least six months’ expenses, this is the first thing you should strive for. If you are above 45 years of age and positioned at a senior or leadership role, try to increase your emergency fund to cover at least 12 months’ expenses.
In case you have already lost the job and have to depend upon the emergency fund for your day-to-day expenses, use it judiciously only on the mandatory and necessary ones like- rent, food, utility bills, loan EMIs, insurance premiums, school fees, etc.
Failing at budgeting/ not reducing the expenses:
Continuing to spend normally even in this crisis situation might land you in a soup. With this, you will exhaust your emergency fund very soon, and may also dip into other savings.
In these tough times, you will have to make some tough decisions and control your urge to spend recklessly.
It is important that you list down your expenses and strictly spend only on things that are essential. Curb unnecessary expenses like OTT subscriptions, club memberships, vacations, shopping, eating out, etc.
Not renewing insurances/ continuing the low yielding policies:
Since your regular income has stopped or is going to be at halt for a while, you might not prefer renewing your insurance, thinking it as a ‘useless’ expense.
This would not be a wise thing to do. In fact, if your resources allow, you should try to increase the insurance covers.
In today’s day and age insurances have become a necessity, especially health insurance. Just think, during this job loss scenario if any medical emergency hits you and your health insurance has expired, wouldn’t it be a miserable situation?
However, if you feel that the annual premium is a big amount, request the insurance company to convert the annual premium into monthly installments but do not cancel your policy at any cost.
On the other hand, it is a good time to review all your insurance policies and surrender the low yielding endowment plans, child plans, money back plans, etc. and pay for your insurance premiums or increase your emergency fund with this amount saved.
Do not Prepay your Loans. Keep Servicing the Loan EMIs:
I know, these are challenging times but it’s important that you continue paying the loan EMIs. Yes, you read it correctly. You should not miss your loan EMI payments even in a high interest rate scenario that we are experiencing these days.
This would not only attract various penalties but will adversely impact your credit score too.
As I have mentioned it earlier, there should always be a provision for loan EMIs in your emergency fund.
Also, you will find many people (experts) advising you to prepay the loans at the cost of your emergency fund, taking other loans, or by withdrawing from your provident fund or investments mapped with your long term goals, like- equities. In the first instance, you might think it is the right thing to do but in the long run, it might create a huge dent to your retirement nest egg or other important financial goals.
But, if you do not have an emergency fund in place or it is not adequate, you can approach the bank, inform them about your situation and ask for a moratorium period or reducing the EMI amount. You can consider refinancing the loan as well. In case of a credit card or personal loan, you can opt for a loan balance transfer.
Withdrawing from your Provident Fund:
If you have the resources and can manage your necessary expenses for some months (budgeting will play an important role), do not withdraw from your EPF. This is meant for retirement savings and holds a very important position in your long-term investment portfolio.
Withdrawing from provident funds will not only disturb its compounding but it is also highly unlikely that you will replenish the withdrawn amount again especially just after coming out of a crisis situation like this.
You should consider this only in the case of extreme situations when you have exhausted your emergency fund and all other potential resources to fund your survival. In short, this should be your very last option, not the first one to manage a job loss scenario.
Falling into the trap of get-rich-quick/ guaranteed income schemes:
In this state of affairs, you would find many fin-fluencers (youtubers, Twitter Pundits) or even friends or relatives for that matter, luring you to put your hard earned money into some get-rich-quick quick avenues like- cryptos, stock trading, F&Os, etc. to multiply your money in no time rather than keeping it in emergency fund.
Or, your mind could go entirely in the opposite direction- completely risk averse, thinking of preserving 100% of the portfolio under the lure of some guaranteed income or pension plan being pitched by your banker or insurance agent.
You would be in a Vulnerable state of mind but you should not get carried by both these extreme lines of thoughts and keep the basics in place. You should keep your long-term investment portfolio asset allocated and aligned to your risk profile and adequate emergency fund in cash instruments to manage your regular expenses instead of falling into these traps.
Job loss scenario: bottom line
Losing a job or thinking about job loss- especially when you are in the mid or the peak of your career can be scary both from an emotional and financial perspective.
It is imperative that you should not lose your nerve and plan your next steps wisely.
Avoiding the above listed mistakes and strict discipline can surely help reduce the financial impact of this difficult situation.
In addition, it is also important that you keep yourself active physically as well as mentally.
Start taking every single step that you might think will help you get the new job you desire.
Until then, you can learn some new skills, take up new courses, engage yourself with some freelance projects, part-time consulting, etc.
The Article on Mistakes to avoid in Job Loss Scenario is written by Mr. Varun Baid, CFP Professional