HOME / Blog / Your Guide To Navigating Actions After Losing A Job: Managing Cash Flow And Resources

Your Guide To Navigating Actions After Losing A Job: Managing Cash Flow And Resources

January 16th, 2025 by Blake Pinyan

Losing a job can be a significant financial blow, as your steady income stream abruptly stops, often without severance. You’re accustomed to a predictable paycheck that covers your regular expenses, but this stability vanishes during unemployment. While unemployment benefits offer temporary relief, most individuals and families must rely heavily on careful cash flow management and savings. This is particularly crucial for those without alternative income sources, such as a spouse’s income, rental properties, or investments.

Individuals who heavily relied on their paycheck to meet expenses must adopt a thoughtful and intentional approach to managing their finances after job loss. This article will explore the following key areas:

  • Reviewing Your Spending Plan
  • Managing Your Available Resources

Reviewing Your Spending Plan

Losing your job necessitates a thorough review of your spending plan. To effectively adjust your finances, follow these steps:

  1. Determine Your Essential Expenses
  2. Cut Back on Non-Essential Expenses
  3. Calculate the Shortfall
  4. Plan for Filling the Income Gap

Determine Your Essential Expenses

When reviewing your spending plan after job loss, start by identifying your essential expenses.

Essential expenses are critical, everyday costs you cannot live without. These can be both fixed and variable but are necessary for maintaining your lifestyle. Failure to meet these expenses could have significant negative impacts. Examples include:

  • Mortgage/Rent
  • Groceries
  • Transportation
  • Utilities
  • Insurance
  • Debt Payments

Steps:

  1. List each essential expense and its monthly cost.
  2. Calculate the total monthly cost of these expenses.
  3. Prioritize these expenses when allocating any available income or resources.

Cut Back on Non-Essential Expenses

Non-essential expenses are discretionary costs you can live without. While they often bring enjoyment, reducing or eliminating them during unemployment is important for financial stability.

Examples include:

  • Travel
  • Subscription Services (e.g., Netflix, Amazon Prime)
  • Dining Out
  • Entertainment

Key Points:

  • Sacrifices may be necessary, such as dining out less, delaying travel, or minimizing entertainment spending.
  • These cuts can be temporary but are essential to avoid financial trouble during reduced income periods.
  • Create a list of non-essential expenses and identify areas to cut back or pause.

Even small adjustments, like reducing dining out from three times a week to one, can have a significant impact on cash flow.

Calculate the Shortfall

Once you’ve identified essential expenses and reduced non-essential spending, calculate your monthly cash flow:

  1. Determine total monthly outflow: Add up all essential and adjusted non-essential expenses.
  2. Evaluate remaining income sources: Consider any predictable income, such as:
    • Unemployment compensation
    • Severance pay
    • Rental income
    • Investment portfolio (dividends, interest)
    • Pension/annuity payments
    • Royalties
    • Side business/part-time work

Shortfall Calculation:
Subtract your total monthly income from your monthly expenses. A shortfall indicates that your expenses exceed your income, requiring you to draw on existing resources or credit to cover the gap.

Plan for Filling the Income Gap

To address the shortfall, create a plan for utilizing available resources until you secure new employment. The next section will outline common types of assets and liabilities and strategies for effectively leveraging them.

Managing Your Available Resources

When managing your available resources to cover expenses during unemployment, it is important to stay informed about your net worth. Your net worth is calculated as your total assets minus your total liabilities.

Let’s start by reviewing the types of assets and liabilities many individuals have access to, along with their associated characteristics. Once defined, we will outline an order of operations for utilizing these resources after job loss. For assets, we will focus on their liquidity and applicable tax rules. For liabilities, we will consider their ease of adoption and interest rates. Liquidity refers to how easily an asset can be accessed and converted into cash.

Common Types of Assets During Unemployment

Common assets that can be utilized during unemployment include:

  • Cash
  • Taxable Investments
  • Retirement Accounts
  • Real Estate
  • Personal Property
  • Other (e.g., HSAs, 529 Plans, Life Insurance)

Cash

  • Examples: Checking and savings accounts.
  • Liquidity: Highly liquid, making it the first resource to cover shortfalls.
  • Taxation: Withdrawals usually have no tax implications, except for taxes on interest earned.

Taxable Investments

  • Examples: CDs, brokerage accounts, employer stock.
  • Liquidity: Generally liquid, though early CD withdrawals may incur interest penalties. Selling stocks or bonds is straightforward, with no early withdrawal penalties.
  • Taxation: Capital gains taxes apply, typically at favorable rates (0%, 15%, or 20%) for long-term holdings. Penalties for early CD withdrawal are tax-deductible.

Retirement Accounts

  • Examples: 401(k)s, IRAs, Roth accounts, annuities.
  • Liquidity: Less accessible due to penalties for early withdrawals (before 59.5 years of age). Exceptions exist for hardship withdrawals or certain medical expenses. Roth withdrawals are tax- and penalty-free after you turn 59 ½.
  • Taxation: Withdrawals are taxed as ordinary income, except for Roth contributions or specific annuities. Taxes should be withheld to avoid surprises.

Real Estate

  • Examples: Primary residences, rental properties.
  • Liquidity: Illiquid; selling property involves a lengthy process and effort.
  • Taxation: Capital gains taxes apply. Primary residences may qualify for exclusions ($250,000 for single filers, $500,000 for married filers). Investment properties face additional taxes, such as depreciation recapture, but may qualify for tax-free 1031 exchanges.

Personal Property

  • Examples: Vehicles, boats, valuables.
  • Liquidity: Generally illiquid; selling takes time and effort. Not ideal for covering immediate expenses.
  • Taxation: Gains are taxed as capital gains, though most personal property depreciates, often resulting in no taxable gains.

Other Assets

  • Examples: HSAs, 529 Plans, life insurance.
  • Liquidity: Depends on the asset. HSAs and 529 plans incur taxes and penalties for non-qualified expenses. Life insurance with cash value can provide loans or withdrawals, although they are less common today.
  • Taxation: HSAs and 529 withdrawals for non-qualified expenses are taxed with penalties (20% or 10%). Life insurance withdrawals up to paid premiums are tax-free; gains are taxed as ordinary income.

Common Types of Liabilities

Liabilities that may be utilized during unemployment include:

  • Credit Cards
  • Personal Loans
  • Cash-Out Refinancing Mortgages
  • Home Equity Line of Credit (HELOC)

Credit Cards

  • Ease of Access: Credit cards are widely available, and new ones can often be approved within minutes.
  • Interest Rate: Credit cards typically carry the highest interest rates among liabilities, making them a costly option for covering expenses. Accruing credit card debt can be difficult to manage, especially if only minimum payments are made.

Personal Loans

  • Ease of Access: Accessing personal loans during unemployment can be challenging, as lenders often require proof of income and repayment ability.
  • Interest Rate: Rates are generally lower than credit cards but higher than mortgages or HELOCs, making them a costly but potentially viable option in emergencies.

Mortgages

  • Ease of Access: Cash-out refinancing may provide funds by leveraging home equity, but the process can take 1-2 months to complete. While some lenders require proof of income, others may weigh credit score, cash reserves, and loan-to-value ratio heavier.
  • Interest Rate: Mortgage rates are typically lower than other forms of debt. However, refinancing is less favorable if the new rate is significantly higher than your current one, as it increases monthly payments and long-term interest costs.

HELOC

  • Ease of Access: HELOCs offer flexible borrowing backed by home equity, functioning like a credit card with a 10-year draw period and a 15-year repayment term. Approval can be difficult without income, as lenders prioritize good credit and low debt levels.
  • Interest Rate: Rates are higher than mortgages but lower than credit cards or personal loans. They are often variable, rising or falling with interest rate changes. HELOCs are more effective during periods of low interest rates but riskier in high-rate environments.

Order of Utilization

When deciding which assets and liabilities to use during unemployment, prioritize liquidity, taxation, ease of access, and interest rates. Below is a sample order for what resources and credit to leverage at which point:

  1. Cash
  2. Taxable Investments
  3. HELOC or Cash-Out Refinance
  4. Roth Accounts and Cash Value Life Insurance
  5. Rental Property
  6. Pre-Tax Retirement Accounts
  7. Other Assets
  8. Personal Property
  9. Personal Loan
  10. Credit Cards
  11. Primary Residence

Cash

Use existing savings as your first line of defense. An emergency fund covering 3-6 months of expenses is ideal. Cash is easily accessible and has no tax implications. Once reserves dwindle, move to the next resource.

Taxable Investments

Taxable investments (e.g., CDs, brokerage accounts, employer stock) are generally liquid and offer controlled taxation. For example, sell stocks with higher cost bases (smaller gains) or bonds with minimal gains to minimize taxes. These funds also avoid early withdrawal penalties.

HELOC or Cash-Out Refinance

Not all debt is bad. A HELOC or cash-out refinance can provide temporary funding. Interest is not deductible unless used for home improvements, but the funds are tax-free and repayable upon re-employment.

Roth Accounts and Cash Value Life Insurance

Withdraw contributions from Roth IRAs or Roth 401(k)s tax- and penalty-free. Similarly, access cash value life insurance up to premiums paid without tax or penalties.

Rental Property

If cash reserves are critically low, consider selling rental properties. While it may not be ideal, selling provides a lump sum without penalties, helping stabilize finances.

Pre-Tax Retirement Accounts

Avoid withdrawing from pre-tax 401(k)s or IRAs due to ordinary income taxation and early withdrawal penalties. Exceptions like hardship withdrawals or specific IRS provisions may reduce penalties but should be a last resort.

Other Assets

Assets like 529 plans and HSAs can be accessed if necessary. Be cautious of penalties and taxes for non-qualified withdrawals, but they may be better options than high-interest loans.

Personal Property

Sell excess personal property if resources are limited. Start with non-essential items (e.g., an extra car). If finances worsen, consider selling items you can live without.

Personal Loan

Apply for a personal loan if other options are exhausted. These loans can provide needed funds but come with higher interest rates and repayment obligations.

Credit Cards

Use credit cards as a last resort due to high interest rates. While they can cover short-term expenses, they may lead to unmanageable debt. Consider balance transfers or debt consolidation if necessary.

Primary Residence

Selling your home should be a final option. Downsizing or renting may provide financial relief, but this step is often a last-resort measure for survival.

We are here if you need us

Losing your job can be a challenging and stressful time, but having a clear, intentional plan to manage your cash flow and resources can make all the difference. Start by identifying your essential expenses, cutting back on non-essentials, and calculating your shortfall. Then, prioritize your available resources, deploying them strategically to fill the gap.

At Anchor Bay, we specialize in helping clients navigate financial challenges like job loss. Our goal is to provide expert guidance so you can make sound, informed financial decisions during uncertain times. Understanding your resources—considering factors like liquidity, taxation, ease of access, and interest rates—empowers you to manage this transition effectively and with confidence. Let us be your trusted partner in building a stronger financial future.