Layoffs are a professional trauma, and it can have a devastating effects on our professional identity.
Layoffs are never easy, and these topics are informational so you’re better prepared for what’s to come. I am not a financial advisor, but speaking from my experiences of helping clients transition after a layoff. I started to see some patterns and challenges with financial readiness that I wanted to share with you.
The immediate shock of layoff sets us into a crisis mode where we need to figure out how to cover bills, get the next paycheck, secure a sense of safety for ourselves and our family, battle the identity crisis, lose trust in our organization and feel like we may need to start from scratch. These are overwhelming, but you’ll get through it. This time shall pass.
And knowledge can be powerful. Today, I wanted to share about the short-term and long-term financial consequences of a layoff, and ways to prepare yourself.
More than a missed paycheck
I entered the professional world around 2007, right before the Great Recession in the United States, and over the past two decades, have managed to recover from 3 organizational layoffs, and helped many recover post layoff.
For many, the financial burden is the scariest – our financial security is shaken by this impact and the results of making money and paying our bills, taking care of ourselves, etc. all has a cost. Scarier still is going through this while having a depleted emergency fund or not having one to start. Nearly, 50% of Americans don’t have enough in their emergency savings to cover three months of expenses, nearly 25% don’t have any emergency savings (Bankrate).
As a result, when layoff happens, people are in a tight spot, often scrambling to figure out their financial situation. Reassessing expenses, cutting discretionary spending, figuring out how to make their next payment, incurring higher debt, all leading to deeper shame and depression, which delays recovery and affects the individual’s self-identity.
The Scarring effect on lifetime earning
I wish I knew about the “scarring effect” of graduating during the Great Recession, and surviving through multiple layoffs at various organizations.
The Scarring Effect refers to the persistent and significant earnings loss experienced after being displaced from a job – it’s not just about time you were unemployed, but loss of income in the years, even decades, after.
A study by Brookings found:
- A year right after layoff, worker saw an estimated 57% decline in their earning
- Five years after, 16% lower pay compared to those who weren’t laid off.
- 10 years after, earnings were 25% less that if they hadn’t been laid off.
Those graduating and entering the job market during the great recession are still underpaid compared to those who entered the job market during the recovery period.
Why does this happen?
There are several reasons for the scarring effect, predominantly loss of work hours, getting/accepting lower salary to return to a job, losing benefits, losing promotion opportunities, become risk-averse, not gaining experiences, unable to invest in skill building, working from a heightened level of anxiety about the next layoff, etc.
The complexities of the impact is personal and professional. As certain local market’s experience layoffs, there is a talent congestion, where there are more talent available for the job market demands, employers can bargain for qualified employees at lower salary, and the company runs on scarcity to avoid further financial burden until economic stability.
Building financial security
While with work the military, they taught me the following: “Proper planning prevents piss poor performance.” It’s a motto that allows them to carry out difficult challenges with confidence by recognizing they’ve anticipated as much as possible so there’s alway a plan.
Here’s what to do before you face layoff decisions:
- Build your emergency fund: Aim to have 3-6 months of living expenses in a separate, high interest, savings account. Easiest way to calculate, 3-6x your monthly take home, if multiple earners in the home, that should be for all income holders in the home.
- Create a realistic budget: Have a bare minimum budget and adjust it regularly – 3-6 months – this is the bare necessities you need to survive. Then elevate your budget accordingly to comfort.
- Manage your debt: Aim to have a low debt-to-income ratio, ideal to pay off the credit cards, and even car. This way it can leave you with great savings potential and reduced monthly expenses
- Understand your benefits: From healthcare to severance packages, recognize how you’ll take advantage of those. You may want to understand how severance is calculate and disbursed (lump-sum, installments, etc.) and the limits, do you stop getting severance if you secure another job? etc.
- Healthcare: If you and your family need health care, start shopping around before you sign up with COBRA healthcare plan.
- Strategic use of retirement account: Max out your savings by continuously investing/reinvesting in your retirement. Select a plan that can let you borrow money against your retirement, where you pay yourself back with interest, and your retirement funds grow simultainously.
- Invest in yourself: Continue investing in yourself and skill building – this will make you more attractive to future employers if you are a victim of layoff.
- Consider minimal lifestyle: Don’t get the big house because your family will visit a couple of weeks a year – instead think about what is needed for you. If you’re near retiring, downsizing your home might be a better option.
- Work with a career counselor/coach: Preparation can be challenging, but you can work with a career coach to navigate these milestones and ensure your lifestyle creep is manageable.
If you’ve already experienced a layoff, here are a few things:
- Reassess your finances: Create the minimal viable budget, what can you neglect, what can you stretch, what do you need to spend, etc. Focusing on paying all housing, utilities, car payments, credit card, etc. adds up quickly – focus on where you can save the most immediately
- Use debt wisely: It’s possible to score 0% credit cards, which can help you stretch your budget until you get a job. Finding low interest rate cards can help you pay for the bare minimum while having a sense of security. Be wise.
- Apply for government aid: Apply immediately, while you’re mourning the loss of your job. Find unemployment benefits, food stamps, rental/mortgage grants, etc.
- Ask family and friends for support: This can be a source of support, they don’t need to give direct funds but a meal 1x per week or car ride can make a difference.
- Invest in yourself: Investing in yourself includes hiring a career coach to help you recover and return to work faster, building skills needed for your future career, and re-establishing yourself as quickly as you can without falling to the traps of financial insecurities, identity crisis, and the various other challenges.
You're not alone
Losing a job is a profoundly challenging experience, and its financial “scarring effect” can cast a long shadow over your lifetime earnings.
From immediate income shock and potential debt accumulation to persistent lower wages in future roles, the financial journey after a layoff can be complex. Going at it alone, without support, will be more challenging than it needs to be – having support from family, friends, mentors, and coach can make the process easier and faster. By embracing proactive financial planning, building strong emergency savings, strategically managing debt, and continuously investing in yourself, you can build a robust financial armor.
Reaching out to career coaching services can provide invaluable guidance and support, helping you clarify your path and boost your confidence. This isn’t just about surviving; it’s about creating a foundation that allows you to navigate future uncertainties with greater confidence and ultimately, redefine your financial future on your own terms. You have the resilience and the tools to turn this adversity into a powerful chapter of growth and renewed financial strength.
Schedule a consultation to find out how I can help.
