This is a guest post written by Nicole Booz of GenTwenty.
Losing your job can feel very discouraging emotionally, but it can also be a stressful time if your job was your primary or only source of income. You will need to make almost immediate changes in your financial life until you are able to replace that income stream and get back on your feet.
Becoming unemployed in itself does not impact your credit but that lack of income can lead to behaviors that, in turn, can negatively impact your credit. A loss of income increases your debt-to-income ratio (DTI) which can play an undesirable role in your financial future if you allow it to remain high and don’t take action. Whether you have an emergency fund or not, these are steps you should take immediately once you’ve lost your income to help put yourself in a better position in the future.
Steps To Take With Your Finances If You’ve Lost Your Job
1. File for Unemployment
Unemployment insurance can help you bridge the gap until you are able to find new employment. Each state has its own program that administers unemployment benefits differently as well as its own requirements for receiving unemployment benefits.
Your unique employment monetary benefit depends on a variety of factors, including but not limited to, how much you used to earn. The way the benefit amount is calculated varies from state to state and is not a predetermined amount.
Unemployment benefits are not guaranteed so be sure to check with your state’s unemployment office on what qualifies you for benefits. You can usually find this by searching Google for “[state] unemployment benefits.”
You may also qualify for SNAP (Supplemental Nutrition Assistance Program) or federal subsidies for health insurance so be sure to check with your state’s requirements for those programs too.
But do start job hunting again as soon as possible. Your unemployment benefits are meant to help you cover expenses until you are able to find new employment, they aren’t there to replace your income for long periods of time.
2. Evaluate your Budget
If you don’t already have a budget and a list of your expenses, now is the time to make one. With a reduced income, you’ll want to make sure you know exactly where your money is going to. Every penny counts.
Start by pulling your past 3 months of credit card and bank statements. Categorize all of your expenses, whether in a spreadsheet or by hand into categories:
- Fixed expenses (mortgage/rent, car payment, internet bill, utilities, cell phone bill, insurance bills, student loan payment, etc)
- Variable expenses (groceries, dining out, gas, etc)
From your list of fixed expenses, which ones are completely necessary to pay for? These include things such as your rent/mortgage payments, your car payment, student loan payment, insurance, etc. Anything that is a debt, secured or unsecured, should be prioritized. Consider these things as essential.
For your fixed expenses, call your providers and try to negotiate a lower rate. You might be able to get a better deal on your cell phone plan or your internet bill just by calling customer service and inquiring about new packages. Be sure to emphasize your loyalty to the company and ask if they are running and promotions.
Next look at your fixed expenses that are recurring payments but are not debts. For example, this might include your Netflix subscription, a monthly/quarterly subscription boxes, and DoorDash or similar delivery services. These services can likely be cut out of your budget until you are able to find employment again and have your extra income back. Immediately pause or cancel those subscriptions so you aren’t paying for unnecessary or unused services.
I also want to note that you might want to check your statements from a year ago too. Make sure you aren’t going to be charged for any annual memberships in the next couple of months that might take you by surprise.
For your variable expenses, it’s unfortunate but temporary that you will most likely have to reduce your discretionary spending significantly until you are employed again. This doesn’t mean that there aren’t budget-friendly ways for you to have fun, but anything like shopping trips, extra dining out, pampering activities, etc. can be cut out for a couple of months until you are employed again.
The truth is it’s hard to say how long you might be unemployed for so if you do have extra money left over once your bills are paid, put that into a savings account for future months.
3. Make as Many Debt Payments as Possible
During this period of unstable income, you’ll want to keep prioritizing your debt payments.
Secured debt (your mortgage or car payments for example) offers an asset as collateral which you can lose if you don’t make the payments. You want to avoid something like a foreclosure or repossession so you’ll want to prioritize those payments.
If you are carrying credit card debt, it’s better to make the minimum payment than to make no payment at all. When determining your budget for the next few months, make sure you are factoring in at least your minimum payment for each of your lines of credit.
If you are unable to make even your minimum payment, contact your lender as soon as possible. While it will vary lender to lender, they will be able to discuss your options with you and hopefully help you through this challenging time.
Your payment history makes up 35% of your credit score so not making your payments on time can have a significant impact on your credit score. A lower credit score can have a negative impact on your financial future because it can keep you from being approved for a mortgage and can lead to higher interest rates which means you’ll be paying more in interest over time.
4. Avoid Relying on your Credit (If you Can.)
On a similar note, you’ll want to keep your credit utilization ratio as low as possible. Your credit utilization ratio is how much of your available credit that you are using, and this number makes up 30% of your credit score.
You can calculate this number by dividing the amount of credit you are using by the amount available to you. For example, if you have $10,000 worth of credit available to you and you are carrying $3,000 on your balance, your ratio is 30%.
Keeping this ratio below 30% will have less impact on your credit score than a higher ratio. You can decrease this ratio by paying off debt but you will want to keep it in mind while you are unemployed because you don’t want to end up relying on your available credit to carry you through the loss of income.
5. Avoid Applying for New Credit Cards
In a loss of income situation, it can be tempting to apply for a new credit card or line of credit to help you cover more expenses. But this is inching into dangerous territory because it means you are going to end up in more debt.
Opening a line a of credit when your DTI is high likely means that you will have high interest rates, which in turn, means you’ll be in more debt over time. Doing this means the financial impact of your unemployment will stretch father into the future than it needs to.
Remember, your current situation is only temporary. A job loss can be challenging to handle emotionally and even more challenging financially. With a plan and smart spending, you’ll get through this period of financial turmoil. If you have questions about your credit, contact the credit repair consultants at Lexington Law for more information.