Unemployment, Savings and Debt
At one time or another, most of us have had to deal with the threat (if not the reality) of unemployment. Losing your main source of income is likely to be a major threat to your financial stability – but there may be various things you can do to prepare for it.
It’s no substitute for a regular, dependable income, but having some savings in the bank can make all the difference if you do end up losing your job. At the same time, carrying debts can make a period of unemployment a lot harder than it might otherwise have been.
To illustrate the kind of issues you could face, let’s take a look at three different imaginary people in three very different situations…
Someone with savings
If someone with substantial savings loses their job, it’s worrying – but it could be worse. With money in the bank, they’ll know they can afford their rent/mortgage and other essential expenses for the foreseeable future. Depending on how much they have saved, and on how quickly they’re able to find a new job, those savings might be enough to tide them over until they can secure a new steady source of income.
It may even mean they can afford to maintain their standard of living in the meantime, although it makes sense to cut back on spending anyway, just in case finding that new job proves more difficult than they thought it would.
To name just one more benefit (and there are many), someone in this situation will be more able to wait for ‘the right job’, rather than feeling they have to take the first opportunity that comes along, even if it’s not what they’re looking for or if it’s poorly paid.
Someone with neither debts nor savings
If someone ends up unemployed and has neither debt nor savings, they won’t have the security of knowing they can afford their immediate needs – but they also won’t be worried about letters coming through the door from their creditors.
Even so, unless there’s something that lessens the financial impact (they can move back in with their parents, for example, or get a redundancy payment, or have valuable property they can sell), that lack of savings could make it a very uncomfortable period in their life.
The difficulties they would face will largely depend on what benefits they qualify for, how quickly they find a new job, whether or not a friend / family member can help them out, etc.
Someone with debts
Someone with substantial unsecured debts faces a real challenge if they’re made unemployed.
On top of all their ‘normal’ living expenses, they’ll have to make payments towards their unsecured debts as well – or contact their lenders and explain why they can’t. Their lenders may well agree to accept reduced payments (or even no payments at all) for a while, until they have a chance to get ‘back on their feet’, but failing to stick to their original repayment agreements can still impact on their credit rating and add to the overall cost of repaying their debts.
The Think Money website has some useful debt guides and information on debt solutions such as debt consolidation and debt management.
Preparing for the worst
If all goes well, it won’t be an issue anyway. Plenty of jobs were secure through the recession and will remain that way now.
Nonetheless, it’s best to ‘prepare for the worst’ even as we ‘hope for the best’. If you have savings, it never hurts to add to them. If you haven’t, remember that financial experts tend to recommend having at least three months’ worth of income put aside for a rainy day.
And if you’re carrying debts, now could be the ideal time to reduce them by as much as possible. To name just two factors (one good and one bad, for the sake of balance)…
The bad news is that the ongoing uncertainty in the country’s economy means many people’s jobs could be under threat even though the actual recession is over.
The good news is that many people are in a good position to work on reducing their debts. It may not help tenants or homeowners with fixed-rate mortgages, but millions of homeowners with variable-rate mortgages are paying far less per month than they ever thought they would, which means they could put more than they expected towards their savings accounts – and/or their unsecured debts – without actually paying more in total than they were back before the base rate dropped to 0.5%.
Useful resources:
How to stay alert of a company that offers debt management
With the rise in the number of Americans who are facing dire financial consequences, it is very obvious that the debt management advertisers have also found an eager audience. Such companies often promise to slash off a huge amount of your debt by helping you pay off your credit cards in single monthly payments. Unfortunately the grandiose promises made by these debt management companies are too good to be true. The debt relief industry is a questionable industry overall and all such companies that provide debt relief to debt-stressed consumers are sitting to make profit out of your financial woes. In order to avoid being duped by your creditors, you require staying alert of the laws and updates in the debt industry. Check out the few points that may assist you in remaining aware of a company that offers debt management.
- Check the status of the company with the BBB: Before handing over your distressed finances into the hands of a stranger company, check the status of that company with the Better Business Bureau. Building the trust of consumers is one of the most important factors that a debt management company should concentrate on. Only a reputed and trustworthy company will treat you as a consumer seeking help rather than a customer. If you check that the company is registered with the Better Business Bureau (BBB), you can stay sure that this is a trustworthy one.
- Determine its non profit status: If the company that you are referring to, claims to be a non profit organization, make sure that you check whether or not it is truly non profit. There is a sudden increase in the number of scam companies who pose to have a non profit status, but are not. The non profit companies have a certificate awarded to them by the IRS. Ask for this certificate and if you see that the company representative hesitates to show you this certificate, consider giving a second thought about working with that company.
- Check the fee structure of the company: If you come across a for profit debt management company that charges advance fees for their services, be sure that they are not trustworthy. Recently the FTC has cracked a new set of rules to restrain the unscrupulous practices of the debt relief companies. This step has been taken to safeguard the debtors from the grasp of the greedy companies. The FTC has banned the charging of advance fees until the companies reduce your debts. Therefore, do not plunge in reducing your debt burden by a company that charges upfront fees for providing you service.
Even though most Americans are struggling to pay off their multiple credit card bills through debt management companies, it seems that America is once again sliding back to its spendthrift ways. Try to avoid the lure of living beyond your means and stop incurring debt as much as possible to secure your financial life.