Fired Without an Emergency Fund!

A WCIer was recently fired/laid off/terminated and wrote to me about his dilemma. From previous exchanges with this particular person, I knew he was a hardcore hobbyist who had been doing quite well, so I wasn't all that worried. That doesn't mean HE wasn't worried, though. Situations like these are not always logical. There is a lot of emotion involved, and the first thing to say is, “I'm sorry.” It stinks to be told you're not wanted for a job, even if the job itself has ceased to exist. The second thing to say is, “There is light at the end of the tunnel,” and, “This too shall pass.” Few unemployment situations are unrepairable, and often the new situation is even better than the old one.

This is really about planning a transition.

This particular WCIer, for whatever reason, had decided to forego a formal emergency fund, generally considered to be a sum of cash equal to 3-6 months' worth of household expenses. The wealthier that one becomes, the more reasonable this sort of decision becomes. Obviously, once you are financially independent (FI) you don't need an emergency fund at all. Your entire nest egg is your emergency fund. This WCIer isn't yet FI, but he and his wife have made great progress in that direction in just a few years. Here are the numbers for their particular situation:

• His income: $30,000 per month
• Her income: $7,000 per month
• Monthly expenses (including taxes but not savings): $30,000 per month (in a high-tax state)
• Non-retirement assets: $16,000 cash, $25,000 Bitcoin, $300,000 stock index funds
• Realized capital losses: $20,000

His question basically boiled down to: “Should I build an emergency fund now or just sell taxable assets as I go?” My reply was short and sweet: “I'd sell them as I went.” (I got the email while standing in line at an amusement park with my kids.) But it seems like a more comprehensive answer might be useful to others, even if this WCIer doesn't need it. I've written before about what to do if you get fired, but we'll make this one a bit more specific to this situation.

#1 Resign or Be Fired?

Sometimes there is an option to resign instead of being fired. This is a decision that should be taken very carefully. While resigning might look better on a resume to future employers and you might feel better psychologically, there are also benefits to being fired.

• You'll probably qualify for unemployment benefits.
• You may get a severance package.
• You may have more time to seek additional work by staying on as long as you can.
• You can prepare for a potential lawsuit against your employer by gathering more information and evidence.
• You may strengthen your legal case (the employer can't say you just quit, and damages may be higher).

Make this decision carefully. It seems wise to get legal counsel if you are given the option.

#2 Ask for Severance

A severance often looks an awful lot like an emergency fund, i.e. a few more months of income similar to what you were making.

More information here:

What to Do If You Lose Your Job

What to Negotiate for in a Physician Contract

#3 Claim Unemployment

Unemployment law varies by state, but if you've been at the job for a while, you probably qualify for some sort of benefit. In my state of Utah, these are the qualifications:

• Have qualifying wages (you made at least $5,100 in the last year)
• Are unemployed through no fault of your own
• Are able and available to work full-time
• Are actively seeking full-time work

The benefit is basically half of what you were earning, but it maxes out at $712 per week or $18,512 per year. It's not that much for someone making $30,000 a month, but it beats a kick in the teeth.

#4 Cut Spending

You might have been spending $30,000 a month. But with an amount like that, a great deal of it is likely variable spending. Take a knife to that monthly budget. Cancel any planned trips if you can still get your money back. Stop subscriptions. Start using any food storage you have. Don't go out to eat. Put off any planned major purchases. You might even consider selling some things. Hoard what cash you do have for this jobless period. Given the high-tax state and the progressive tax system, your expenses will fall more than you might think just from the tax savings.

#5 Stop Investing

Turn off your wife's 401(k) contributions. Make sure any taxable dividends and interest are coming to you as spendable cash and not being reinvested. Delay any HSA and Backdoor Roth IRA contributions until the income problem has been fixed. There's a good chance these contributions just end up being delayed, not completely foregone. But cash is king when there is an income problem.

#6 Boost Income

Your wife can look into overtime and ask for a raise. You'll obviously be looking for work, including self-employment and part-time opportunities. Every little bit of income reduces how much you need to tap into your taxable assets and how long they last.

More information here:

My Emergency Fund in Action

The Importance of Spouses Being on the Same Financial Page

#7 Sell Anything with a Loss

Review your taxable account. You can turn any asset with a loss into cash right now with no tax consequences (actually a positive tax consequence). Given the $20,000 in losses you already have, you can sell most of what you have already bought this year, up to $20,000 in gains. That might be $100,000 or more in spendable money with no tax cost. Once those losses are gone, you'll want to be a little more careful and only sell assets you've owned for at least a year so you can enjoy long-term capital gains tax treatment.

Bitcoin isn't treated any differently than the traditional assets in this regard. Whether to liquidate more than you need for a given month is just a market timing decision. If you knew that the market was going up, you would delay. If you knew the market was going down, you'd sell today. My crystal ball is cloudy. I have no idea what the market is going to do in the next 3-12 months, but I do know it generally goes up. So, I'd try to delay selling as much as possible. But that is also to minimize regret. I'd regret it more if I sold assets worth six months' worth of spending (and paid taxes on it) and then only needed two months' worth than if my assets dropped a bit before I sold them. You may feel differently.

 

Getting fired stinks, but it's not the end of the world. Minimize the financial consequences and move on with life. Not having a formal emergency fund matters less for someone with a large taxable account.

What do you think? If you've lost your job, how did you adjust your financial life? What advice would you give to this WCIer?