How to Prepare for a Job Loss

by Paul R. Ruedi, CFP®

Between the wave of high-profile layoffs and growing fears about AI reshaping the workforce, job insecurity is reaching more people than ever before. Though I think it is important to remain optimistic about the future, a solid back up plan often helps people sleep better at night, and can help mitigate the impact of a drop or loss of income. Fortunately, there are several things you can do in advance to prevent an interruption in income from derailing your finances.

The first way to mitigate the impact of a decrease or loss of income, is to always live below your means. To the extent possible, try to live your life in a way that provides some extra buffer room in your budget. In addition to providing extra savings in good times, it makes it less likely you will need to make painful cuts should your income decrease.

I realize telling people to live below their means or leave extra buffer room in their budget isn’t always the easiest advice to implement, because some lifestyle costs cannot be easily cut or reduced. Though you can’t change the past, you can be more frugal going forward.

You don’t have to plan to radically downsize your house or subside entirely on ramen noodles. But if your income may change, don’t sign yourself up to go on expensive vacations you’ll have to pay for later. Try to keep any major purchases like cars to what is absolutely essential and practical. Don’t put off necessary things, but perhaps put some spending items on hold for just a little longer until your financial picture is more certain.

In addition to living below your means, a cash emergency fund can help people get through many financial hiccups like a disruption in income. The textbook recommendation from the Certified Financial Planner Board is for people to have three to six months of non-discretionary expenses saved in cash to deal with financial curveballs. But that number can vary. Depending on how easily your income can be replaced and other factors like whether you are the sole provider for your household, you may want to have even more set aside.

 Though in general you don’t want to hoard an unnecessary amount of cash, if you are worried about your future income and job prospects you may want to hold more cash than you would otherwise. If you aren’t sure what is the right amount to set aside, you may want to talk to a financial advisor.

Paul R. Ruedi is a Certified Financial Planner™ professional with Ruedi Wealth Management in Champaign, Illinois.