How much money do you need to survive losing your job?

Why calculating requirements for mere survival can speak volumes about your current financial habits.

All of us have the same fear: “What would I do if I lost my job today?” It’s a common question, and a very healthy question to ask ourselves periodically. While it isn’t feasible to plan so that a job loss has no measurable impact on our lives, it makes no sense to leave this scenario out of our financial contingency plans. We carry insurance in case of automobile accidents, life insurance to care for our loved ones when we are gone, and some of us (especially here in Florida) ritually prepare for storms and hurricanes. A little time spent on managing how to survive losing your job doesn’t seem unwarranted.

But you may ask, “How could I possibly weather a sudden job loss and what can I do to plan for it?” It all comes down to your current financial planning. If you have a solid budget in place and are not currently stuck in a paycheck-to-paycheck situation, it is quite possible to mitigate some of the damage that can be caused by sudden unemployment. If you are unfortunate enough to be living one payday away from ruin, we have you covered in upcoming articles designed to get you out of that rut.

 

Prepare for the Storm in Calm Seas

To begin your preparation, you should consider the following:

 

  • Calculate the surplus income you have each month
  • Audit your bills each month
  • Optimize your investments
  • Estimate how long you can maintain until you regain employment

If you follow our suggestion and strive for budgeting to zero then you should be able to quickly recognize how much surplus income you have each month, even though you are allocating all of it. This is a very important number, because the amount of time you can survive losing your job within your current lifestyle depends on it. According to the US Bureau of Labor Statistics (link), the average time for landing a job is about 5 months. While circumstances may vary, this is a good time frame to plan for.

We can calculate a good estimate for use in future planning as follows:

5 Month Reserve = 5(Current Monthly Lifestyle Cost)

(Months Needed to Prepare)x(Monthly Surplus)=5 Month Reserve

So, we can use the following formula:

(Months Needed to Prepare) x (Monthly Surplus) =5(Current Monthly Lifestyle Cost)

Finally:

It’s pretty clear from this final equation that the greater the monthly surplus, the quicker you can prepare for an event like an unexpected job loss. Nevertheless, the challenging part is maximizing that surplus.

It’s not a bad idea to sit back and take a good look at your current spending with this kind of preparation in mind. How long is your “Months Needed to Prepare”? If the answer seems longer than you feel comfortable with, then a short-term financial diet may serve you well.

In order to formulate that financial diet, consider the following:

 

  • How many obvious forms of waste can you identify in your monthly budget?
  • How many expenditures could be classified as unessential?
  • How liquid is your surplus income?
  • What other sources of income could you take advantage of?

With the exception of waste, changes that you may make financially from the list above do not have to be considered permanent. The goal is to reach the amount you need in the least possible time in case your income spring dries up. What happens when you obtain that goal?

Being able to cash out your investments on demand is essential in this contingency plan. Low risk is another top priority. Since both short-term and low risk equate to low returns, you must accept that this is the cost of security for this scenario. However, there are some good options. A high-yield savings, money market, or cash management account would be a great option and one that is insured by the FDIC. Just understand that you can expect less than 2% return.

There are certainly things that can happen in your life that you can’t predict, and some are extremely difficult to prepare for. However, how to survive losing your job doesn’t have to be one of these. Examining your current financial state for weaknesses against a sudden storm is not difficult, and taking a look at your monthly finances in this light may give you a better understanding between what is needed to survive, and what is needed to survive the way you are currently living.

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