Several major companies in the technology and media industry, such as Twitter, Meta, and Microsoft, have announced massive layoffs last year in response to decade-high inflation rates that point to a possible recession. Other industries including food, transportation, and retail have followed suit, leaving workers wondering if their roles will be affected.
If you are notified that your job is among those affected by mass layoffs, it is important to make immediate plans so that you can prepare for the major financial changes that will follow.
5 things to do with your money when you get fired
Certain businesses—such as those employing 100+ workers—are required to give employees at least 60 days notice that their roles will be affected by mass layoffs or plant closings under the Worker Adjustment and Retraining Act (WARN). The hope of giving advance notice is that employees have time to prepare financially if they are unemployed for some time.
Some of the best ways to manage money after a layoff include contacting your human resources department for available severance packages, filing for unemployment to increase your emergency savings, and having a strategy for taking care of your insurance and 401(k) plan. It’s also important to review your current spending habits and cut back on unnecessary purchases when you’re low on income.
Contact HR
When you are fired, your employer will tell you whether you will get a severance package outlining the financial terms of your termination. This generally includes severance pay and benefits based on how long you worked for the company before you were fired. It may include unused paid time off or assistance in finding a new job.
Most employees don’t realize that a severance package can be negotiated in the same way as a job offer. For example, if you believe you are entitled to a larger severance payment than the company is offering, you can request an increase in payment. Your employer has the option of agreeing to your offer or continuing to pay the original amount.
It is important to review your severance package thoroughly and understand the terms of the agreement before accepting it. Accepting your severance agreement may waive your right to file a wrongful termination claim or file for unemployment insurance. Normally, you will have up to 21 days to receive an approval.
It’s important to note that there is no federal or state law that requires employers to provide severance packages to employees—unless you are a member of a union or your employment contract states otherwise.
File for unemployment insurance
If you’re laid off, unemployment insurance can help boost your emergency savings while you look for a new job. It can take several weeks for your country to approve your application, so it’s important to apply as soon as you know your role will be terminated.
Unemployment insurance eligibility requirements and application approval timelines vary depending on the state where you live, but most states require you to work at least part-time or earn a minimum income to qualify. Your state can also use this information to calculate how much benefit you get.
Most states provide up to 26 weeks of unemployment benefits and require you to file weekly claims to continue receiving payments. Some states may have additional eligibility requirements, including requiring you to actively seek new employment while you are receiving benefits. See your country’s eligibility requirements before applying.
Update your insurance plan
If your insurance plan is through your employer, your insurance benefits usually end when you are fired.
To combat this, the federal government created the Consolidated Omnibus Budget Reconciliation Act (COBRA) to provide full access to your previous employer’s health care plan for a limited period of time after you are fired, usually up to 36 months. However, you have to pay an additional 2% premium and administration fee to get insurance under COBRA, which is usually more expensive than regular insurance plans.
Rather than paying high fees to extend your current coverage, you may be eligible to sign up for coverage under the Affordable Care Act, which typically offers lower premiums based on your income level. You also qualify for coverage under a spouse’s plan or a parent’s plan—if you’re under 26.
Take a look at your 401(k) plan
There are several options to consider when evaluating what to do with your 401(k) plan when you withdraw, including leaving the funds in your current plan, rolling your plan over to a new employer or an IRA, or paying it all off. Depending on which one you choose, there may be additional tax implications.
Stick with your current plan: If you have $5,000 or more in your 401(k) plan, you can leave the funds in your current plan. Even if you’re allowed to keep the plan, you won’t be able to contribute or withdraw funds until age 72, which is when you must take minimum distributions from the plan, regardless of your employment or retirement status.
This means you’ll need to open a new 401(k) plan or IRA if you want to continue saving for retirement. Plus, you won’t be able to put your retirement savings into financial turmoil when you’re laid off.
Roll over your plan to your new employer: If you find a new job after being laid off, you can roll through the previous employer’s plan to the new employer’s plan relatively easily by contacting the previous plan administrator and completing the required documents, said Amy Hamasaki, certified financial planner at Mountain Wealth Planning.
It’s important to note that your new 401(k) plan may have different rules, investment options, and fees. Review your new employer’s plan carefully to ensure it meets your investment needs before deciding to roll over funds.
Roll over your plan to an IRA: If you do not want to use the new employer 401 (k) plan or they do not offer one, you can transfer your retirement savings to the IRA by contacting the administrator of the previous plan and ask them to disburse the funds to your IRA administrator.
You can choose between a Roth IRA and a Traditional IRA, but there are additional tax consequences in doing so. For example, if your retirement savings have grown tax-deferred in a traditional 401(k) plan, a Roth IRA rollover will be considered a taxable event.
Cash out your plan: If you don’t have emergency savings built up and need cash right away, you can cash out funds from your 401(k). However, this should be a last resort after evaluating other alternatives because you will have to pay ordinary income tax on the funds and an additional 10% early withdrawal penalty if you are under 59 ½.
You will also lose the compound interest that would have accrued if the funds remained invested in the retirement account and that will affect your overall retirement savings in the long run. “If you cash out of your 401(k), it’s going to take you longer to get where you used to be,” Hamasaki said.
Call back to spend
Make a budget simple and stick to it. If you are living off emergency savings or variable income to support you after layoff, you should review your expenses and divide them into three main categories to help you dial back on unnecessary spending.
have to: A large portion of your budget should be allocated to paying bills, including mortgage or rent payments, utilities, food, gas, minimum loan payments, and insurance. This also includes student loan payments, which are currently on hold until no later than June 30, 2023.
In other words, you should include the fixed costs that you pay each month. These expenses should be a top priority, especially if you have limited funds.
Want: A small part of your budget may be to pay for things you want, such as traveling home to visit family during the holidays or buying new clothes to attend a job interview. But you should deduct the amount you normally spend on discretionary expenses if you’ve recently been laid off.
“We’re really focused on paying off fixed expenses first because when the sky is falling down, you want to really tighten your belt a little,” says Hamasaki. This may mean eating in instead of going out to a fancy restaurant or resetting your holiday shopping plans.
Save and pay off debt: If you don’t have a job lined up, you may need to stretch your emergency savings to last longer while you look for a new role. If this happens, it may make sense to put the excess back into savings for a later date. Additionally, if you have credit card or consumer debt, you may want to make additional payments beyond the minimum payment to reduce interest charges.
If your budget allows, try to follow the 50/30/20 rule that allocates 50% of your after-tax income to expenses, 30% to wants, and 20% to savings or paying down debt.
For example, let’s say you have 6 months of expenses saved in your emergency savings, totaling $4,000 per month. You should spend $2,000 on fixed expenses, $1,200 on wants, and $800 on savings or paying down debt.
Takeaway
If your employer has given you advance notice that your job will be affected by mass layoffs, it’s important to make an immediate financial plan so you can prepare for the changes that will come along with losing your job.
Review your severance package and don’t be afraid to negotiate the terms, such as asking for an extension of your health insurance benefits to avoid paying high premiums under COBRA. If your employer doesn’t offer severance pay, consider getting unemployment insurance to cover your financial needs.
“Not many employers expect to be able to negotiate with them [on their severance package]”said Hamasaki. “However, if they feel that this creates an ambiguous situation, whether it is legal responsibility or they feel regret that they have to let you go, there may be room for strength and negotiation.”