Job Loss: Got a Financial Game Plan?

According to the Bureau of Labor Statistics, the number of unemployed was 15.4 million and the jobless rate was 10 percent in November. While those numbers “edged down” from previous months, there's no doubt that job loss and unemployment are hot topics, and people are worried.

Some of those lucky enough to hang onto their jobs have experienced salary reductions, reduced hours, or withheld bonuses.

Even if your income has remained unaffected, hearing stories on the news and witnessing friends and family members experience job loss can make a person nervous. It's why car dealerships and travel companies are offering job loss insurance, reassuring consumers that it's okay to buy a new car or book a cruise.

But wiggling out of a major purchase means little if you still can't afford to pay your mortgage after job loss.

Worst-case scenario planning
This made me think about what my financial situation would look like if I lost my job, if my husband lost his, or if somehow we both found ourselves unemployed. What is our worst-case scenario? Could we cover the essential bills? And for how long?

This is the process I used to create a worst-case scenario snapshot of our finances. I'll use fictional couple Michael and Kay as an example. Their combined monthly income after taxes is $5,000. Michael makes $2,000 per month, and Kay brings in $3,000 per month. They have an emergency savings fund of $10,000.

Step one: Assess current expenses
First, they'll look at their current monthly budget:

  • Mortgage: $1,100
  • Food & Dining: $500
  • Bills & Utilities: $325
  • Gas & Fuel: $300
  • Vacation Savings: $200
  • Massage Therapy: $150
  • Gym: $100
  • Property Tax: $100
  • Health/Prescriptions: $140
  • Clothing: $100
  • Auto Insurance: $45
  • Home Insurance: $30
  • Donations: $30
  • Netflix: $18
  • Personal Care: $25
  • Misc: $120
  • Retirement Savings: $834
  • Other Savings: $883

Step two: Cut expenses
Next, Michael and Kay examine their fixed and discretionary expenses and determine where they could cut back, if needed. They eliminate savings and clothing from the budget right away. They decide that they could cut back on food by $100 if they quit eating out, and they could live without massage therapy and gym memberships. This lowers their monthly expenses to $2,633.

  • Mortgage: $1,100
  • Food & Dining: $500 $400
  • Bills & Utilities: $325
  • Gas & Fuel: $300
  • Vacation Savings: $200
  • Massage Therapy: $150
  • Gym: $100
  • Property Tax: $100
  • Health/Prescriptions: $140
  • Clothing: $100
  • Auto Insurance: $45
  • Home Insurance: $30
  • Donations: $30
  • Netflix: $18
  • Personal Care: $25
  • Misc: $120
  • Retirement Savings: $834
  • Other Savings: $883

Step three: Evaluate possible scenarios
If Michael lost his job, their monthly income would be $3000. With monthly expenses of $2,633, they'd have $367 left at the end of the month and wouldn't have to dip into the emergency fund except in case of emergencies.

If Kay lost her job, their monthly income would be $2000. They'd either need to cut back more, or use the emergency fund to make up the $633 difference. If they used the emergency fund, it would last for about 15 months — barring any unforeseen expenses.

If both Michael and Kay lost their jobs and had to live off of the emergency fund, their savings would last for about three months.

Other expenses and income
In a real-life scenario, you'll also need to account for health insurance. Whether you'd get coverage under your spouse's plan, an individual policy, or through COBRA, you'll need to add the premium into your financial game plan.   

Unemployment benefits, if you qualify, are another factor in your worst-case scenario budget. Don't forget that unemployment benefits are taxable. To avoid a ginormous tax bill on April 15, have federal income taxes withheld or pay quarterly estimated taxes on your unemployment income.

Next steps
Depending on your outcome from this exercise, you might decide it's not time for a new car or a cruise because you need a bigger emergency fund. Or maybe you can relax because you're right on track with your savings goals.

Either way, it's a good idea to know where you stand and what your game plan will be if you were to experience job loss.

Have you created a worst-case scenario budget? Do you feel prepared to weather a job loss (either your own job or your partner's)?

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Writers Coin
Writers Coin
10 years ago

Shouldn’t you count unemployment in there somewhere?

Financial Samurai
Financial Samurai
10 years ago

April, I like how you tell readers to lay all the expenses out there and see what we can slash. Frankly, we can all probably slash A LOT of things we can do without for 6 months. We’ll probably be focusing a lot more on unemployment and how to get a job for 2010 as we exit the year. The topic is so important to us, as it’s really kinda depressing knowing the state of the labor market. That said, I firmly believe 1H10 is going to be a banner year for job growth! Why? B/c firms OVER fired in… Read more »

jonasaberg
jonasaberg
10 years ago

I don’t have an emergency plan in place but I do keep track of every single expense and have a six month emergency fund. That gets me pretty far as I could quickly expose areas where I can cut back. I have thought about making a specific plan though, writing everything down and make sure the numbers add up. I have also thought about adjusting my current budget to the level where it would be equal to the amount I’d get in unemployment benefits if I lost my job. The rest I’d put in savings and if I lost my… Read more »

lostAnnfound
lostAnnfound
10 years ago

Never thought about a worst-case scenario budget. This is an interesting idea. Although at this point we have a minimal emergency fund and are taking all we can possibly spare to pay off CC debt.

sjw
sjw
10 years ago

We ran these numbers about a month ago. I’m the primary wage earner, so we checked to see what happened if I lose my job. If we stop the extra money we are pre-paying on the mortgage, cut savings (retirement, vacation, house renos), and assume we can drop the credit card charges to $0 (should be doable, it’s mostly clothing and meals out), we have a deficit of about $300/month. With an emergency fund of $20,000+, and some slush money in the various savings sub-accounts at ING, we’d be able to go for quite a while if nothing too bad… Read more »

Eric @ thriftyvillage
Eric @ thriftyvillage
10 years ago

I’ve always recommended to people that they make an emergency budget right along side their main budget and base their emergency fund off that. My emergency fund allows us to live for 6 months if only one of us loses a job or 3 months if we both lose a job, and those figures are based off the emergency budget. I’d love for that number to be larger- I’m losing my job in January and if I don’t find another before that, I’ll definitely be wishing for a larger emergency fund- but it is what it is and it certainly… Read more »

Chris
Chris
10 years ago

This is great advice. When I worked on my budget about 6 months or so ago I started adding in extra formulas and such to see how we are doing. I incorporated a separate row for those expenses I deemed “living expenses” then I summed up all those fields in the excel sheet. This gave me how much we’d have to make to pay the necessities. We then compared that against our incomes to see what would happen if one lost a job (if both did we are working on building our emergency fund but have a long way to… Read more »

Little House
Little House
10 years ago

I recently laid out my monthly budget and saw a few places where we could cut the fat in our budget if we needed to. One of the largest bills in our budget is our rent, $1,800 a month. So if things got really bad or I lost my added income, we could always move into a one-bedroom apartment in a less expensive area. Next year will be a little unpredictable for me income wise, the school district I’ve worked for over 8 years is having tremendous budget issues. So, I’ll have to make some predictions about my income by… Read more »

Kate
Kate
10 years ago

Too funny- we just wrote out our worst case scenario budget yesterday.

I was thrilled to see that we could give off the lower salary (mine) indefinitely, if need be, or more realistically, a year to two years.

ami | 40daystochange
ami | 40daystochange
10 years ago

We did this – and it has saved us since I lost my job. We set up an automatic savings program so that a small part of every paycheck went straight into savings, patting ourselves on the back and never imagining that we’d actually use the money. Then I lost my job, severance ran out – and we had this fund to keep living off of. That emergency fund means that I’m not frantically grasping at every terrible job opportunity that comes along (for which I’d be rejected as overqualified anyway). Not only do we have funds to pay for… Read more »

Des
Des
10 years ago

They could cut Netflix as well for the duration of their unemployment. It’s not much, but everything helps in a situation like that.

Jean
Jean
10 years ago

Thanks for the post. While I am VERY grateful to still be employed, the thought (FEAR) of losing my job is always in the back of my head. I need to get serious and get my head out of the sand and make some REAL plans on paper in case I find myself joining the ranks of the unemployed.

Kandace
Kandace
10 years ago

I like the post and the mindset it gives readers. DH and I have been running the worst case scenario numbers for a while and are prepared. It’s a good exercise. We are both self-employed, so health insurance and retirement savings all come out of our pockets. So far, the work has still been coming in. The only downside I see to the post is how does it relate to people who have a lot of consumer debt? Your budgets pretty much work for those who are debt-free, with the exception of housing costs. What would you suggest to those… Read more »

Neal Frankle
Neal Frankle
10 years ago

I ran a “worst-case” budget – and when the stuff hit the fan last year, our actual “worst case” budget was nothing like it. We easily found additional ways to cut.

Still the exercise was a good one because it created the right mind set. Nice job April.

April
April
10 years ago

Kandance–Good point about debt repayment. If I lost my job and had debt, I’d just pay the minimum until I found a job. To factor that into the scenarios, I’d look at total debt and estimate what the minimum payments would look like, and include that in expenses.

Carol
Carol
10 years ago

If you are going down the worst case scenario trail, you should have a post or two about when you should negotiate-down totals on debt and follow by pay-off hopefully reducing that total to 1/4 of its former proportion. If you don’t think that is a good idea, at least you would agree that it is awful that some people are falling prey to unscrupulous credit counselors that say they will do this service and do not or do so at an exorbitant rate. When we negotiate down mortgages we call it a “short sale”. And on that note: I… Read more »

Gwen
Gwen
10 years ago

Terrific example! Taking a close look at worst case can be revealing, that maybe even worst case isn’t as terrible as our imagined fears.

kaitlyn
kaitlyn
10 years ago

I only have 1 month of expenses saved right now (I know, I know! I’m working on it). My plan would be to call my student loan lenders and beg for a hardship deferment. That’s my biggest expense.

Happily, my job is safe so long as a) I don’t do anything stupid, and b) the company itself doesn’t shut down.

Foo Finance
Foo Finance
10 years ago

This is a great exercise. I do this at least yearly to make sure I still have adequate savings as expenses tend to change over time. Any time you adjust your normal budget your job loss budget should be adjusted to match!

I also want to add that this is a good exercise to do if you are still trying to cut things from your budget on a more permanent basis. It forces you to ask yourself if you REALLY need this or not. Works especially well for those with debt!

Steve
Steve
10 years ago

My wife and I try to keep our expenses low so that we could live off the lesser of our two incomes. We don’t have kids yet so this is relatively easy. And yet, because my wife works for the government, her take home is only a few hundred bucks after all the special savings accounts she gets access to. We don’t have cable or netflix (we get our movies from the library), and pay our gym memberships one year at a time. There are a couple things we could cut for a while – eating out once a week,… Read more »

Lulu
Lulu
10 years ago

I have run the job loss numbers in my head but they are so depressing that I did not write them down. I do have a plan for job loss that involves me packing up and moving in with someone but I pray that it does not come to that.

Ken
Ken
10 years ago

I have not devised a ‘worst case’ but I need to ASAP. I can already tell my emergency fund is NOT what it needs to be. Thanks for the prompt.

John Paul
John Paul
10 years ago

Nice post. You would be amazed at what you can save when you cut out simple things.

I was getting 2 ice coffees a day about 6$ x7 over $40 saved.

There is always money to save if you look hard enough

Ana Sierra
Ana Sierra
10 years ago

Job loss (or underemployment) has already hit _at least_ 10 per cent of us. We all know that the government stats are underestimates of the actual job loss. I think this is worst case scenario “lite”. If you can leave Netflix, donations, and misc. on your list, this is hardly a worst case scenario.

Steve
Steve
10 years ago

P.S. what’s the “1/10th rule of car buying”?

Dustin | Engaged Marriage
Dustin | Engaged Marriage
10 years ago

We definitely have been planning for these contingencies. Not only have we created an emergency budget as you have described very well here, but I have also kept “feelers” out in my industry. I am confident that other opportunities would await me if my current job fell through, but it certainly brings peace of mind to plan ahead.

Avistew
Avistew
10 years ago

Well, I don’t have a job, so if my husband lost his job, we’d have to reduce our expenses to about nothing.

– move back into his parents’ guest room and abuse their hospitality again ($750 saved a month)
– cut the entertainment budget, the bills for the place we wouldn’t be in anymore, leaving only food costs.

Our food costs being 250-300 per month, our emergency fund as it is could only help us out for 3 months.

But we’re working on making it bigger.

Nicole
Nicole
10 years ago

Great post! I like the way it is pretty simple (much easier than making a full budget, but still with useful information) and hopefully underestimates the amount that would be able to be cut. It’s nice having a bit more of a savings cushion, especially since it probably takes a little while to really adjust to the worst case scenario and figure out how to pare down to the bone. This pre-exercise helps you think about some big cuts you can make right away while you’re still too much in shock from the loss to do serious planning. (And, of… Read more »

E
E
10 years ago

In case of job loss, we are screwed. We might manage to live off my income, if I can persuade hubby to cut cable, internet, phone, and eating out down to nothing. (that’s a pretty big if.) We could not live off his. I am working on the e-fund but it is a slow process. We have maybe 1-2 months’ expenses in there.

Shara
Shara
10 years ago

One point is that people should do this BEFORE losing a job. Have a plan for what you are going to cut back on, and a schedule. A lot of people wind up in trouble because they expect things to turn around more quickly than they do. For example if I lost my job I would immediately cancel cable. After 3 or 4 months I would also cancel internet and cell phone services (assuming the contract allowed it). I wouldn’t cancel internet right away since it would be needed for the job search, but if unemployment dragged on I would… Read more »

chacha1
chacha1
10 years ago

We didn’t have an emergency plan, so when I was laid off last spring, it took a “crisis summit” to figure out how we would proceed. Unemployment compensation ended up covering groceries, fuel, and insurance (we were already self-insured). DH covered the rent and utilities. We hunkered down and I job-hunted pretty hard. Registered with five different staffing agencies, but due to long experience and higher education, was not considered for many entry-level positions I would have been happy to take (especially if I got to move into a new field and get some new skills). Did some teaching part-time… Read more »

Frugillionaire
Frugillionaire
10 years ago

Excellent post. A healthy emergency fund gives you wonderful peace of mind, even in such turbulent economic times.

Beth
Beth
10 years ago

Great points! This is a good place to start. However, as someone who actually did lose a job a couple of years ago, there are still a few costs people have to consider: Moving — it’s not as simple as saying “I can save $400 a month by moving from a $1200 apartment to an $800 one”. Moving expenses, putting down a deposit on a new place, switching over your services and potential commuting time when you do find a new job also have to be considered. (That is, if you can actually rent a place without proof of employment).… Read more »

Suzanne
Suzanne
10 years ago

I am still in the process of building up my emergency fund. After a year I have 4 month’s worth of expenses (and yes, I’ve looked at it line by line, subtracting the unnecessary expenses and adding extra for COBRA). In another year I’ll have 2 more months available, plus I’ll have paid off a student loan. But I still have anxiety since I am single and have a mortgage. If I really lost my job now, what would I do? I could live off the EF for 4 months. Then what? The question I struggle with is whether I… Read more »

Meg
Meg
10 years ago

Great post! I think everyone should do a “financial fire drill.”

How much should you have in your emergency fund? I read somewhere that it should be one month for every 1% of unemployment, plus one month. As the unemployment rate is currently 10%, folks should try to have about 11 months of living expenses in an emergency fund.

As someone mentioned upthread, the longer you are unemployed, the more likely it is that some major crisis will occur (you fall and break your arm, or the furnace stops working, etc.).

bethh
bethh
10 years ago

If I lost my job, my state’s unemployment ($450/week; 1300/month after estimated taxes) would cover all of my fixed expenses, and I have enough in savings to cover food and other necessities for at least 6 months (eating beans and rice and other inexpensive foods!). I’ve paid ahead on my final debt, so could stop paying it for the duration of my unemployment. If I had to move for a new job, I could, but if it didn’t come with a relocation allowance I would have to put the expenses on a credit card, which obviously isn’t ideal. I’m working… Read more »

liz
liz
10 years ago

Thanks. This has really helped me in figuring out my emergency fund (step #3) with two different scenarios now that I’m trying to transition from rent to own housing. So I’m planning on a 3 month emergency fund pre-own and a sixth month post-own and allowing for the extra expenses of house ownership. Five more months on step #2 left!

Suzanne
Suzanne
10 years ago

A lot of people seem to be counting on unemployment benefits. I’m sure that it depends on the type of position you have, but in many white-collar jobs it can be better for your career to “resign” rather than allow yourself to be out-and-out fired. When that happens, there is no unemployment. You still might not get much severence, but it’s easier to explain to future employers than a firing. And the employer will often throw in a reference which they wouldn’t do if you got fired.

Anthony
Anthony
10 years ago

I’ll chime in with everyone else: This is a really good post!

We are building an emergency fund right now, which will last only about 2 or 3 months if we both lose our jobs. I’m gonna use this post to figure out how much we need to save. But also, I need to think about what we can cut from our expenses.

Steve
Steve
10 years ago

@Suzanne – a lot of people believe that is true, but it doesn’t make it true. Especially with regards to unemployment, you may be leaving a lot of money on the table just to be able to say you resigned. Also, there are many levels of “fired”: getting actually fired due to misconduct (the technical meaning of the term); getting terminated due to performance; getting laid off due to reduction in staff/lack of work/economy/many other reasons; quitting voluntarily; there’s even “constructive termination” where your employer deliberately poisons your environment hoping you will quit. Anyways, if you “resign” involuntarily and then… Read more »

Suzanne
Suzanne
10 years ago

It’s definitely a case by case basis. I’ve been in that situation where I had to make that choice twice (hmm maybe I suck at my job). The first time I was “laid off” and got unemployment. It’s very different to explain a large layoff and another to explain that you personally were laid off and no one else in the department was. I did not get a recommendation and it took me four months to find another job. The second time I got that choice I “resigned”. I got a strong recommendation and found another job immediately. In my… Read more »

Erica Douglass
Erica Douglass
10 years ago

I did a worst-case budget scenario and it helped a lot. There were even things I found right away that I could cut! I definitely recommend that everyone tally up their monthly expenses.

Unfortunately, many people are afraid to do this. Maybe a post on why people are so scared of this, and how to get through it?

-Erica

Anon
Anon
10 years ago

We made an emergency budget 9mths ago. Worked hard to pay down debt and save from our single income. We have 3 kids and were open with them about our plan. In October I actually activated our bare bones budget to try to save as much as possible before the axe fell. It was tough on us all. In November my husband was laid off, but thanks to our hard work, we had got rid of our debt and had 6mths of savings. our biggest worry was healthcare. COBRA was going to cost us $1300 per month! How on earth… Read more »

Moneymonk
Moneymonk
10 years ago

We live on one salary and I have to say we manage to handle any job loss or emergency

Rosa
Rosa
10 years ago

We have an “emergency” budget, where we just cut expenses (cheaper daycare, no discretionary spending) and stay independent. We have an emergency fund that would cover that budget for six months or so (the uncertainty is COBRA costs vs. unemployment benefits – just our living expenses it will cover for 6 months).

And then we have a really emergency budget with no childcare costs and no health insurance, and then our budget stretches for a year. In a year we could sell our house without going underwater (though if it were this year, we’d take a loss).

cathleen
cathleen
10 years ago

As someone who LIVED the worst case scenario these last 18 months I can’t recommend doing this enough. It helped that I am fairly financially savvy (owned a profitable business) but after we sold our business the economy crashed and neither my husband nor I could get job. We are both 45 and neither of us had EVER been unemployed. I’ll spare the ugly details but it’s been the hardest, toughest time of our lives. But he landed a great job 3 months ago and I start my new job in January. More money than we made in our profitable… Read more »

pdxdayhiker
pdxdayhiker
10 years ago

This becomes much more tricky when there is only one income to begin with. Seeing examples like these makes me realize how high my mortgage is compared to my income (which I think is not uncommon).

Steve
Steve
10 years ago

Any company, boss, or HR department that would extort a resignation out of you by withholding a reference is being rude. I would tell them to go stuff themselves, and get a reference from a trusted boss or coworker. If you don’t trust anyone then you should have found a better job long ago if at all possible… If I found myself in this situation I’m not sure what I would do, but it’s a rare circumstance and I think far too many people err on the side of resigning vs. getting terminated or laid off. Specifically regarding references, there… Read more »

Pistolette
Pistolette
10 years ago

Some circumstances are more extreme even for the well prepared, unfortunately. For instance, I was a high earning publicist in 2008 when we decided I was going to stay home with our two new babies until they started preschool (about a 2-3 year ‘life project’ I call it 😉 ). My husband earned more than enough to support us as an electrical engineer, and since we were living in moderation, life was good. UNTIL he was laid off 3 months ago. Now we’re living on our emergency fund, which will last us for 3 more months. I CAN’T get a… Read more »

Terry
Terry
10 years ago

I think the long term solution to recession is to build up security by starting a solid part-time business.

During the last recession, my work hours were cut to 50%, and I was motivated to start buying fixer-upper houses and renting them out.

Now 8 years later, I have a safety cushion. Even if I lose my job, I would still have rental money coming in.

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