If you’ve been out of work for a period of time, it’s a huge relief when the paychecks start rolling in again. Depending on how long you were unemployed, what your finances were like before the job loss, and other sources of income in your household, getting back to work could be just the beginning of a long recovery process for your finances.
But here’s the good news. While you were unemployed, you and your family probably got used to spending less. Those habits can now be a huge benefit to your finances long-term, in some cases even allowing you to be stronger financially within a couple of years than you were before the lay-off.
To make this work, you need to resist the status quo expectation that your spending “should” return to former levels. This doesn’t mean you can’t celebrate the new job or enjoy a few small additional luxuries. But, if you can consciously choose to maintain a lower level of spending, you will have a powerful tool to quickly rebuild. With the cash you’re saving, here’s a 6-item priority list to tackle:
1) If your emergency fund is completely depleted, rebuild a small buffer first (start with $1,000 to one month’s expenses). See my blog post on 10 ways to rebuild an emergency fund for ideas on this.
2) If debt has been accumulated, create the typical debt “snowball” program by paying off highest interest rate debt first. See my December 2008 newsletter for details on this strategy.
3) If you borrowed from retirement plans, be mindful of the plan’s rules for repayment to avoid a taxable distribution which could trigger taxes and penalties that would hurt your recovery efforts. These rules could trump the ideal strategy of paying back the highest interest debt first.
4) If you let critical insurance lapse, get your insurance back to the needed levels. This is also a good time to re-assess your insurance needs. It’s possible to be over-insured, and there may be some policies you let lapse that you’re better off without.
5) As the worst debt is eliminated, start adding to the emergency fund to get to 3-6 months’ expenses while paying off the last of the debt.
6) Update your retirement or other goal projections to determine what your contributions need to look like to make up for the lost time.
Once you’ve accomplished these 6 priorities, you will be well on your way to creating your desired financial future. You’ll probably be used to living on less by this point. And you’ll have created the freedom to choose when you’ll indulge in a splurge that you’ll really enjoy, as opposed to feeling trapped with a high level of fixed expenses.
If you have other ideas on financially recovering from unemployment, I’d love to hear them. Please feel free to contact me directly or post them as a comment to this article.