How to Survive an Unemployment Spell

Brief periods of no income can derail your finances – here’s how to minimize the pain.

Brief periods of no income can derail your finances – here’s how to minimize the pain
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For Aaron, a Minneapolis-based blogger who asked not to be identified by his last name, a sudden layoff just over a decade ago turned into a year and a half without steady work. The 38-year-old, who helped start the personal finance website ThreeThriftyGuys.com, says he felt a deep sense of discouragement as he struggled to pay his bills. "I remember even applying for jobs at McDonald's, and I couldn't get in," he recalls.

Aaron's lack of financial preparedness didn't help – he says he didn't have much in the way of savings at the time, and he had debt payments to make. His only lifeline was unemployment, which enabled him to continue paying is rent, along with his optimism, which helped him believe his next job was just around the corner.

Unfortunately, Aaron's story is pretty typical. According to a report released earlier this year from The Pew Charitable Trusts' Economic Mobility Project, one in three American families experienced unemployment at some point between 1999 and 2009. The report, "Hard Choices: Navigating the Economic Shock of Unemployment," says families without savings and assets that they can turn to during emergencies are vulnerable to inflicting long-term damage on their finances. Indeed, unemployment can lead to an emptying out of retirement and college savings accounts, as well as the loss of other assets, like a home.

"Families who are low income … are most likely to experience unemployment and are also least likely to have the wealth resources to help buffer that period of unemployment," says Erin Currier, director of the Economic Mobility Project. Families that experienced long-term unemployment were the most likely to tap into any resource they could find, including selling their homes or draining long-term savings accounts, which Currier says jeopardizes parents' economic mobility as well as that of their children.

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"Some families were forced to make really hard choices and decisions that will absolutely impact their children's education or retirement savings, which could in turn affect their children's economic mobility," Currier says.

Young people without families to support can also find themselves in trouble without the safety net of a significant savings account. When Brenna McCarthy, 24, a public relations professional in New York City, was suddenly laid off after her last agency lost a big client earlier this year, she says she was "completely unprepared." She adds, "I had very meager savings. New York State provided around $400 a week for unemployment." Along with her final paycheck and severance package, she says she was able to just get by until she found another job about a month later.

At first, McCarthy spent the way she normally does, with daily coffees, restaurant meals, and shopping, but she quickly realized that had to change. "Once the reality set in, I sat down and budgeted every single mandatory expense, including bills and food. … I also eliminated any monthly fees I didn't need," she says. That meant no more Netflix, Hulu Plus or Spotify subscriptions.

That's just the kind of belt-tightening that David Tysk, an Ameriprise financial advisor based in Eden Prairie, Minn., recommends for anyone who's experiencing a bout of unemployment. "I often have clients that find themselves in that situation, and I try to tell them to very quickly and immediately make changes to their lifestyle, rather than make changes after they run out of money," he says.

Tysk also says everyone needs savings and cash reserves for just this purpose, even if bank accounts aren't paying much in the way of interest. "The money is not there to grow – it's for safety and security," he says.

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Gail Cunningham, a vice president of the National Foundation for Credit Counseling, agrees that a healthy savings account is the best line of defense against temporary unemployment and recommends socking away at least 10 percent of your current income. "People tell me all the time, 'I can't afford to save.' Well, you can't afford not to," she says. She suggests tracking your money for one month and then deciding what you can cut in order to funnel money into a savings account. "You can't plug the hole until you know where the hole is," she says.