Managing Finances When Recession Leads to Layoffs

If you read this month’s NEST Edge newsletter, you’ll know that an economic slowdown is underway. Sean has been preparing our portfolios for it for months. At NEST, we’re in a good position to survive and thrive in this contraction, whether it becomes a recession or not. Are you?When the economy goes into a contraction, jobs are one of the first casualties. And when contractions turn into recessions, it gets even worse. Right now, our economy is moving into a period of contraction after peak growth. During economic expansions, money is flying, and people are buying. In order to meet the increased demands of these bountiful times, jobs are created, and companies hire to increase their production, making low unemployment one of the hallmarks of an expansion. It feels like we’re on an upward trajectory that will never end. But it does end, and we once again find ourselves in the contraction stage of the economic cycle.Depending on the nature of the recession, some sectors, such as retail, manufacturing, and leisure, are more vulnerable than others. But none are completely resistant to downsizing. If signs point to a round of layoffs coming in your sector, it’s time to start thinking about what you can do to prepare yourself and your finances for the possibility. In this post, we’ll get into things that you can do to ensure you’re in the best financial situation if the worst should happen.  

Why companies have layoffs

It’s simple — when business is booming, companies need more workers at every level to meet ravenous consumer demand. But then the first signs of contraction come: stocks drop, sales slow, inflation soars. Businesses read the writing on the wall, and they know that if it hasn’t happened already, soon this staffing surplus will become a drain on profits.Time to trim the fat. It sounds heartless, but a business’s top priority is to stay in business, followed closely by making profits for shareholders. When the economy slows down, one of the quickest methods for tightening the belt is layoffs.More viable than increasing sales in a downturn and quicker than raising prices that will only further inflation, layoffs are a quick way to reduce labor costs and raise the bottom line. Of course, the ranks of the newly unemployed might take issue with the strategy. After all, it isn’t easy being on the job market when the job market is, by definition, shrinking. In this situation, the least prepared are going to have the biggest struggle on their hands. Fortunately, there are things you can do to make sure that if you face a layoff, you are prepared for it.  

How you can prepare for layoffs

Start preparing yesterday

If only we could turn back the clock and, armed with the wisdom we have today, start preparing months or years ago. And maybe you did, which is obviously ideal. But even if you’re a little behind, you can start now. Do not delay!Make the following steps your second job today. If a layoff is on your horizon, working furiously to prepare yourself will ease the blow. If you happen to dodge the ax, you’ll only be in a better financial position than you were.  

Reduce cash burn

Now is a really good time to review your budget and to make sure you’re sticking to it. Analyze your cash flow, and then cut your output. In a recession, the market is down by at least 10%. Let your budget reflect that by reducing your cash burn at least that much. Pull back on the extras first — subscriptions, entertainment, eating out, travel. If you still haven’t achieved a 10% reduction, look at your bills and see if there is any room to reduce expenditures there.This is a good strategy anyone can use to weather a recession, but it’s especially important to stretch what you have if you could soon be on the job market.  

Extend your runway

Normally Gloria, our financial planner, would recommend having 3-6 months in living expenses saved in an emergency fund. But if you’re facing economic downturn induced layoffs, your job hunt could last longer than you’d expect. In order to get you through an extended job search, we recommend doubling your emergency fund, aiming for 6 months to a year’s worth of living expenses. This means putting back as much as you conceivably can. And if you do find yourself with a pink slip in hand, make sure any severance package you receive goes straight into this fund.  

Cash on hand

When we say that you should aim for 6-12 months of living expenses in your emergency fund, we’re talking liquid funds. If your emergency fund is tied up in investments or retirement funds with early withdrawal penalties, it’s not easily available for you to use to pay for things like your mortgage or groceries. Delays in accessing your emergency funds can lead to late payments and increased credit card usage, both which end up costing you more in the long run. So, make sure that your money is easily accessible to you. The last thing you need when you’re on the job hunt are complications in getting to your own money and thus, unnecessarily increasing your burn rate.  

Meet with your financial advisor

If you’re already working with a financial advisor, you’ve created a plan for your finances — savings, retirement, debt repayment, insurance. But when your employment changes, so might your plan. Schedule a meeting with your advisor to ensure you’re on track to continue working toward your financial goals, while also ensuring you can support yourself and your family as you work to find new employment. Which leads us to our next tip:  this a great time to talk about any retirement accounts you have through your former employer. 

Move your 401k

An employer matched 401k contribution can be an excellent benefit to working for a company. But if you’ve been laid off, or even if you’ve left of your own volition, the employer will no longer be matching your contributions. And that means there are more and better options for your money. A lot of people don’t know that when you leave a company, you can take the funds in that 401k account with you. And moving it into a new employer 401k isn’t your only option. By moving your funds into an IRA or a Roth IRA, you have a lot more investment options and your money can be actively managed. Talk to your financial advisor about the best option for you.  

Relax and start looking for your new job

If you’ve followed the previous steps, you have 6-12 months of runway, you’ve reduced your cash burn, your emergency fund money is on hand, and you’ve updated your plan with your financial advisor. With your finances squared away, you can focus on updating your resume, getting out there and networking, and finding your next position. This is why we plan. And having a well-prepared plan means that when difficulties arise, we can focus on next steps rather than stressing about our financial situation.We can’t control whether or not our company will have layoffs, or if our positions will be made redundant. What we can control is our preparedness for this type of situation. If you’d like to ensure that you’re in the best position to make it through this economic contraction, whether you’re laid off or not, schedule a no-obligation call with us. In our nearly 30 years of experience in personal finance and investment management, we’ve been through our share of contractions and recessions, and come out on top. Let us help you do the same. If you’re an Austinite, a Texan, or just plain interested in improving your financial situation, please reach out at info@nestfinancial.net. We love working with individuals, families, and entrepreneurs, helping them realize their financial goals and thrive, even during uncertain times.  Find us on:LinkedIn  Facebook  Yelp  TwitterDISCLAIMER: We are legally obligated to remind you that the information and opinions shared in this article are for educational purposes only and are not financial planning or investment advice. For guidance about your unique goals, drop us a line at info@nestfinancial.net.