Dear Debt Adviser,
I’m unsure of my job stability at this time since the company has talked about filing for bankruptcy and has laid off 80 percent of its staff.
I have credit card debt and enough in my savings to pay off my credit cards. Should I do that or keep the money in my savings in case I become unemployed in the near future?
Your job instability seems sure to me! With four out of every five employees gone, I’d say you are being overly optimistic if you don’t seriously consider your job or at least your current rate of pay as being in serious jeopardy.
You and a lot of other Americans just like you would be wise to begin planning now for how you’d handle a job loss or pay cut. Paying down debt is certainly one of my favorite bits of advice but when you face a job loss, it may not be the right time to do so. I not only recommend that you keep your savings intact, I advise you to add to your savings as much as you can while you are still employed.
Boy Scouts and Debt Advisers know the value of being prepared. Few events in life cut the ground out from under you like a job loss, especially in such a difficult economy where jobs are hard to find. So to get you prepared, I suggest that you begin by creating a job loss budget, updating your resume and letting your friends and contacts know you may be looking for a new job in the near future.
Back on the budget front, I want you to pare down your spending to only essentials. Since “essential” can mean different things to different people, let me give you my definition. When you are confronted with a significant or complete loss of income, spending on essentials consists of keeping a roof over your head, food on the table and transportation to find and get to a new job.
Drilling down further, include paying for your utilities and skip the cable television bill. Keep your Internet connection for job hunting and entertainment. Use coupons at the grocery store and pass on eating out and filet mignon for the immediate future. Pay your car note and insurance, but cut back on trips in the car.
You get the idea. If you’d like some tips, I suggest you go to MoneyManagement.org for some short, free and informative webcasts that may be helpful.
Next, put aside the money you have left in your savings account after nailing down your bare-bones budget. It will be hard to make the sacrifices necessary while you are still earning your current salary, but it will buy you more time to find a new job when and if the time comes. If the company turns around and you end up keeping your job or you find a new job quickly, you can treat yourself to something wonderful with the money you saved.
If you haven’t already, stop using your credit cards. You may need any available credit that you have on the cards if things get really rough down the road. You have a finite amount of cash. Once your cash is gone, it can’t be easily replaced. So as a temporary stop-gap measure when your income is temporarily vaporized, I recommend using your available credit first.
Stretch your cash by making minimum payments on your credit card accounts. I also want you to keep current on your payments and keep your balances under 50 percent of your credit maximum limits. This will do several things for you. It will keep your credit report credit strong, which is important when looking for a new job. It will keep your credit score high, which is important to avoid nose-bleed interest rates when every dollar counts. And it will conserve your precious savings until you land a new job.
Joanne, congratulations on saving for a rainy day and I hope your advance planning will help you weather this storm and come out on the other side without any lasting damage.