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Managing your money after furlough or salary reduction

Smart ways to control spending and save

Until 2020, the term was rarely used—typically it was used to describe soldiers’ visits home in wartime, or when federal employees were faced with budget stand-offs. Then the COVID-19 pandemic hit, and millions of workers from service industries to higher education and healthcare were let go from their jobs indefinitely. Companies continue to furlough employees even as the economic recovery continues.
  
While the uncertainty can feel like a loss of control, you do have control over money you’ve saved and what you do with it. Here are some action steps to consider:
  1. Understand your benefits.
The first step after a furlough, or layoff, is to file for any unemployment and related federal and state programs for which you qualify. Those benefits were expanded through the CARES Act, so it’s important to file as soon as you can so you don’t miss out on weeks for which you’re eligible. Also take a close look at the way your employer-provided benefits may change. Do you get to keep health coverage, and for how long? Would your premium increase enough that you should try to get added to your spouse or partner’s plan instead, or explore any available government options?
  1. Track your income.
Now is the time to get a true grasp on where you stand. Your monthly take-home income will change, so the first step is understanding, in detail, how much income you have. Next, track down exactly how much you are spending each month. It may take some doing, but you should be able to find the information in your bills, bank and credit card statements, for example. Remember the expenses that hit a few times a year, such as tax payments or insurance premiums. A budget worksheet can help you get started.
 
Next comes the moment of truth: Do you have more money going out than coming in? Or do you still come out ahead?
 
  1. Focus first on big expenses.
If you need to scale back your spending, you may want to call any lenders. Ask about modifying payment plans to reduce the monthly amount—or deferring your payments until your furlough ends. Mortgage lenders, student loan providers, credit card companies, utilities and other providers with whom you have long-term relationships are worth a call. Whatever you do, don’t just fall behind or miss payments without talking to them first.
 
  1. Prioritize.
While you’re documenting your monthly expenses, look for things like subscriptions and services you have forgotten about or rarely use. Rate what’s important and what’s a waste. You can probably skip some expenses without missing them. Also look for ways to comparison shop: Could you lower your cell phone bill or car insurance premium by changing providers? Review giving to family members and charity, asking yourself what you can afford now. It’s OK to suspend gifts in a crisis.
 
  1. Consider your passions.
Do your passions involve valuable assets? A boat, RV, or motorcycle you use intermittently, but spend to store or maintain, could relieve financial stress and headspace. On the flipside, your passions could also provide a lucrative side hustle.
 
  1. Don't rush to tap into retirement savings.
If you have exhausted these steps and still find yourself struggling to cover your expenses, there’s one more possible source of cash before tapping into your retirement investments: Do you have a rainy-day fund? If so, and you haven’t used it yet, now is the time. It makes more sense to utilize emergency savings than to take on debt or chip away at your future. You could also borrow against the cash value of insurance policies or sell investments outside of retirement accounts before considering retirement withdrawals. (Still, before you start selling stock funds, consider the tax implications—especially if you’re selling at a loss.)
 
If you don’t have any of these options, or you have already used them, it may be time to consider your retirement savings as a resource. You can take COVID-19-related hardship withdrawals from your workplace retirement plan, if its rules allow you to do so, or from an IRA. The CARES Act raised the amount you can withdraw to $100,000 from all of your retirement accounts combined, and it erased the 10% early-withdrawal penalty. But you’ll be locking in any losses from the market downturn and could miss out on growth during recovering markets.
 
Consider taking a loan, rather than a withdrawal, from your workplace retirement plan. That way, you are committed to paying the money back in three years so it can continue to work for your future. If you decide to take a hardship withdrawal instead, you might start with a smaller amount rather than cashing out the whole account.
 
The good news is that there’s a way to recover from a furlough. When you go back to work and no longer need the money, you could return the distribution to the account—or to a new employer’s plan—at any point in the next three years. And you can rebuild your emergency savings, as well. With your newfound money-management skills, you can continue saving confidently for your financial future.
This material is for informational or educational purposes only and does not constitute fiduciary investment advice under ERISA, a securities recommendation under all securities laws, or an insurance product recommendation under state insurance laws or regulations. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on the investor’s own objectives and circumstances.
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