Preparing For A Layoff

Matt asks the following question about preparing for a layoff:

My girlfriend is working the Dave Ramsey baby steps.  She has the $1,000 emergency fund and is now working on knocking down the credit cards.  Her job has laid off about 25% of the workforce and things are not looking much better for them and she might be next if they do another round of lay offs due to the time she has been there.  She is going to get $1,200 or so back on taxes.  Would it be better to pay down debt with that money or to save it?

Since your girlfriend is a Dave Ramsey fan I’ll pass along his advice for this scenario, which I happen to agree with wholeheartedly.  What she is facing is what Ramsey refers to as an impending financial storm–”there are storm clouds on the horizon.”  When we are fortunate enough to see these storms coming it is time to pile up money.

Many employers are reducing jobs in this economic downturn, and I personally think it is a good time to beef up emergency your fund to help survive a layoff.  This is particularly true if your employer is announcing job cuts.

I went through something similar about six years ago at my last employer.  For the first time in their corporate history they announced a significant workforce reduction.  I watched several friends and coworkers come in planning to work on a Thursday morning only to be led out by security carrying all their personal possessions from the office in a cardboard box.  It was a sobering experience, and I knew I could very well be next.

When the layoffs were announced I immediately slowed my debt snowball plan, only paying minimums and storing everything else in an emergency fundWhen the clouds cleared (I found a new job in a new town) I used some of the money in savings to restart my debt snowball plan.  If I had lost my job in the interim we could have lived off of my emergency fund for a few months while continuing to keep debts current.

I hope things improve at your girlfriend’s employer, and she is able to keep her job.  But this is one of those situations where she should prepare for the worst, and hope for the best.

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Comments

  1. Five simple steps my own girlfriend took:

    1. Tell your boss you will go ahead and quit for the right severance.
    2. Use severance money to pay off as much debt as possible.
    3. Marry Matt.
    4. Make Matt Pay off your debt.
    5. Have lots of cute babies so matt will forgive you/get big tax refunds.

    Ten years later – we have four girls and no debt except for our home.

  2. Thank you very much for your opinion on this. I feel much better about starting my emergency fund instead of paying off debt. We are possibly going to face layoffs in a year and I have absolutely nothing saved. I’m just begining my non-messy financial journey.

  3. @ jon – that’s one of the sweetest stories I’ve ever heard!

    @ Matt – since she does have advanced warning, she should start living as though it’s already happened. See if she can pare down her expenses so she can manage on just the amount her unemployment benefits/severance would be, and sock away the rest of the money. That will get the emerg fund up, but it will also prevent the added pain of having to lose some of your luxuries right after the blow of losing a job.

  4. I would definitely contact people in my network of friends. Nothing too serious but just to let them know I may be losing my job soon and to see how things were going with them. I would never ask someone directly for help finding a job but by keeping in touch people will have you in mind. Long story short- building and maintain a strong network of friends.

  5. Well, I disagree. I did the debt snowball…. I have paid off all of my debt because of my scare… Now my extra money that I save will last longer because I have no debt…. I will not renew my car lease and that will again reduce my burn rate!! Get out of debt!!

  6. Studenomics, why would you never ask someone directly for help finding a job?

    I have. I have a friend who works at the hospital she gets a referall bonus (as do I at my current job), so if I were to think about going there (and I am if I get laid off, thinking about it that is) of course I would ask her for her help.

    I have also offered my resume writing skills help to others, and others who know I write them well have asked.

  7. Good advice. This is definitely something we’ve been thinking about. Our jobs look stable for the next six months or so, but if the economy continues to falter, we might need to rely on emergency funds eventually.

    I reallllly want to get our last credit card paid off, but you’re right – perhaps it’s best to save, pay the minimum, and then use some of the savings for cc payments when the economy improves and our jobs are on more even ground.

  8. As with everything in the world of financial planning, the answer is “it depends.”

    It depends on what it costs her to live each month; what the balance on the credit card is; what the interest rate on the cards are; whether she would need to buy health insurance on her own once she is off the company payroll (it won’t do much good to have paid off unsecured debt on a credit card only to be left without the means to purchase health insurance)

    Try to think a little outside the box. What does this mean you say? Unless she is buried in debt make sure she is splitting the debt paydown/savings thing; open up a HELOC (don’t use the darn thing, just open it) if she owns a home and has decent equity; make sure she has the cash available to pay for (at least) Major Medical.

  9. My company has been doing major layoffs. There is a certain amount of fear throughout the entire business about more layoffs to come. As such, my girlfriend and I have been preparing ourselves for the worst.

    I have been funding my emergency while continuing to pay off my credit card debt. I think it is important to continue paying down debt while saving for emergencies. I felt that I had enough money in my emergency fund to give me an easy feeling, but when my neck may be on the chopping block I know that I would feel like I should have saved more. I am redirecting a lot of my diposable money towards funding my EF now.

    Layoffs are terrible, and I feel for those who are losing their jobs. Prepare for the worst while hoping for the best.

  10. Wise advice. I actually just discussed this topic with one of my closest friends. He’s worried about losing his job in the coming months. I told him to start paying the minumum on all credit cards, cut all misc costs that aren’t required, and pump as much money into his savings account as possible.

  11. Lots of good advice above! As for the tax refund, I would save it for the emergency fund for now, while paying just above the minimum payments on credit cards.

    If things work out on the job front, the money can be used for credit card payments later.

  12. This is the same situation we are in now (husband might get laid off), and we’re doing the same thing. I figure that once we know he’s safe, we can take all that extra money we saved and put it toward the debt. To only have a $1,000 emergency fund with layoffs looming is foolish if you ask me (and Dave Ramsey).

  13. The first thing I would say to anyone who is a David Ramsey fan is how many of your hard earned dollars have you paid out to line David’s pockets? Once you have asked yourself this tough question. Then start logically thinking, David is not teaching anything that common sense and our grandparents have already taught us. Spend wisely, and save wisely. IT’S NOT THAT TOUGH FOLKS!!!! Pile the cash ! WE ARE ALL IN FOR AN ECONOMIC SITUATION UNLIKE ANYTHING ANY OF HAVE EVER KNOWN.

  14. Jenna,

    I’ve never spent a cent to line Dave Ramsey’s pockets – his books are readily available at the public library, and I’ve only read The Total Money Makeover.

    You’re right, much of his stuff is common sense. By the time I found his book I’d already done almost everything in it on my own. But it took me a good while to figure it out.

    Some people need extra direction and I think he can help them get on the right track.

    You are correct, we should all be cutting spending and saving as much as possible, however its done!

  15. OK- I am Matt’s girlfriend and let me just clarify…..I have far more then 1,000 in an emergency fund, take that times about 6! So I am not foolish and I have very little debt other then my home! As a matter of fact my total debt is not much over 3 grand and that includes a dentist bill I got slapped with and new windows I put in my house to save some really high energy cost. (The windows were so old they still had the weights in the wall) My car is 10 plus years old and paid off and will be driven till it cost me too much money to keep or the wheels fall off. I also work 3 jobs plus go to college.
    The advise is greatly appreciated and I agree that most of this stuff is common sense. Unfortunately we live in a world where financial common sense is about as common as a dinosaur so many people do need this in black and white.
    I have decided after reading many of these comments that I will stop paying more then the minimum on my bills until I know I am once again secure, which includes saving my tax return.
    Thanks again
    Matts Girlfriend

  16. Matt’s Girlfriend-

    Sounds like you have your head on straight and have a good grip on your financial situation… you just needed to confirm the right thing to do.

    Good luck with your job situation. Hopefully your job will work out, and you can use the savings later to pay down your debt, which is not excessive.

    I do think the extra savings will make you feel more secure in uncertain times!

  17. Personally, I would either pay off the debt, or make sure I have enough to make proper payments.

    This recession might last four or five years… but your credit history lasts 7. If you are late on one payment, it will show for 7 years.

    Think about the long term. Think about your credit report.

    Aggie

  18. I say save up cash. Cash is king and yes, you may have more monthly obligations with debt payment if you are laid off, but you have cash in the bank. If your efund runs out, you’ll could be withdrawing money from CCs at an interest rate of 28% or more.

  19. Lots of great advice on here, but I was wondering what you all would do if your job is secure–no layoffs, just received a raise and bonus–and you have some debt (6K) but not a huge cash cushion ($2000). The finance charge on the debt is 13.99@, but the cash gets less than 3% right now. I looked at Dave Ramsey’s advice, but I wasn’t sure about the 1K EF. His followers–hmm, sorta sounds familiar–and he make it sound as if 1K is really all you need til you pay off your evil debts, but now I’m wondering.

  20. Um, I meant to ask specifically about an upcoming $2500 refund check, as in, should I pay down debt or save it, given my circumstances as described above. Thanks in advance.
    PS. I do realize it’s a big refund, but this was mainly because of points paid for a refi.

  21. Sheri-
    If it were me I would live exactly as you are now and sock the bonus and the raise into the debt like you never even got it. If you are comfortable with the $2,000 in cushion/ef then use the refund check also to throw on the debt. If you are thinking you might have a major car repair or furnace to repair then maybe split the refund and put half of it on debt and half on the emergency fund-that would give you a $3500 emergency fund and have you down to at least 2k in debt. I think you have to modify your emergency fund to fit “your life”. I want mine higher because my job is not stable right now and my car has 100k miles on it…..so I have to be ready to replace a motor or transmission at any given time. If you are feeling pretty safe use your refund & kill off debt. Just my thoughts :)

  22. Sheri -

    I’d consider splitting the refund – using part to pay down debt (maybe $1500) and adding the other $1K to your emergency fund.

    It’s not strictly ‘by the books’ Dave Ramsey, and you could just put it all on the debt if you’re okay with the $2K emergency fund, especially since the debt is at a higher interest rate.

    Personally, I like having a bit larger emergency fund. If you do save part of the refund I would put any spare money coming in on the debt to continue paying it down. Use the extra income from your raise for the debt payments.

  23. I think it is best not to get too caught up on following Dave Ramsey or guys like John Cummuta exactly, but taking as much of their advice as possible and fitting it to your situation as best as you can.

    I think the main thing with Dave and the $1000 EF is that most people don’t really save money for the “what ifs” that will happen, such as car repairs, furnace repairs, roof repairs, etc. If you don’t have any money saved then you may be tempted to just put it on the CCard. If you have a stable job then after you have a little bit of a cushion they advocate to pay off as much consumer debt as possible.

    And for lining Dave’s pockets, I think his books are all $20 or less on ebay. I got one for $7 including shipping. If he has a good product that helps people who cares if he makes alot of money doing that. He has helped thousands of people get out of debt and take control of their finances. It is mostly commone sense, but how many people do you know that follow it or do it on their own? Very, very few. I think the average American has $400 total or less in savings or something like that.

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