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How to adjust your budget after losing your job

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If your emergency fund is meager, you may want to postpone saving for retirement until you have 3 to 6 months of expenses saved up.

 

Explore ways to reduce monthly fixed expenses.

Just because something is a fixed expense doesn't mean you can't change it, at least temporarily. Here are some places worth exploring.

Student loans. If your income is reduced significantly, you may be able to temporarily reduce (or pause) your monthly student loan payment. Depending on the type of waiver you get, your principle may or may not continue to accrue interest. Options include student loan deferment,2 income-driven repayment,3 and forbearance.4

Health insurance premiums. These can be a significant burden on a family, especially if you lack employer-sponsored healthcare. If your pay goes down significantly, talk to an accountant or other tax professional about whether you'll ultimately qualify for an ACA subsidy given your reduced wages.

Children's health care premiums. If your pay goes down enough, you may qualify for free or subsidized healthcare through the U.S. Children's Health Insurance Program(CHIP).5

Consolidate credit card debt. Can you transition your outstanding debt to one credit card especially one with a lower interest rate?

 

Reduce your savings.

Retirement savings is one of the last things you'll want to cut, especially if you are getting a tax break for your contributions. For example, if your top marginal tax rate is 20%, contributing $100/month to a tax-deductible retirement account only reduces your ultimate take-home pay by $80/month.

That said, there are some times when experts recommend that you deprioritize retirement savings.6 Here are a couple of key items to assess as you decide what to do:

  • The status of your current emergency fund. If you don't have at least 3-6 months of living expenses saved, consider prioritizing building your emergency fund over saving for retirement, at least temporarily.
  • Credit card debt. If you have outstanding credit card debt, you may want to consider reducing your payments to your retirement rather than just making the minimum monthly payment. This is especially true if you're paying a high interest rate on your credit card debt.

If you have a spouse who is still working and has access to employer-based 401(k) matching funds, try to prioritize making the maximum contribution if you can, because otherwise you're leaving free money on the table.

Remember, this decrease is your monthly income is almost certainly temporary. Getting creative about living within your new means will ensure that you can weather the financial storm and not be saddled with extra debt when your income returns.

Important disclosure information

This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

  1. Pegoraro, Rob, "The Best Cell Phone Plans," New York Times Wirecutter, updated October 9, 2020, accessed November 5, 2020. Back
  2. Probasco, Jim, "What Is Student Loan Deferment?" Investopedia, updated October 10, 2019, accessed November 5, 2020. Back
  3. U.S. Department of Education, "Income-Driven Repayment (IDR) Plan Request," accessed November 5, 2020. Back
  4. Probasco, Jim, "Student Loan Forbearance: Pros and Cons" Investopedia, updated October 10, 2019, accessed November 5, 2020. Back
  5. Healthcare.gov, "The Children's Health Insurance Program (CHIP)," accessed November 5, 2020. Back
  6. Hartman, Rachel, "8 Times to Stop Saving for Retirement," U.S. News & World Report, published October 21, 2020, accessed November 5, 2020. Back