My personal layoff drill
How the ant, the grasshopper, the Honeybee and COBRA all play a part in my planning for a job loss.
One of my favorite fables attributed to Aesop is "The Ant and the Grasshopper." I mean, really. What's not to love?
You know the story: The grasshopper spends all summer long partying it up like a rock star while the ant prepares for the coming winter by building a shelter and storing food. Of course, winter eventually arrives and the industrious ant finds himself well fed and toasty warm while the improvident grasshopper simply ends up as, well, toast. The fable offers a terrific lesson for kids -- and adults -- on the importance of saving and hard work.
Why I'm constantly saving for winter
As an engineer, I occasionally have to endure business cycles when my employer has to lay off employees. It's the nature of the industry and one that I have always taken very seriously, especially since I am the sole breadwinner for my family.
If I were laid off tomorrow, I would be entitled to roughly three months of severance pay, after which I would be eligible to receive unemployment benefits of roughly $2,000 per month (before taxes) -- which on the surface would seem to pose a tremendous problem because our household expenses are currently, on average, more than $8,100 per month.
Don't panic -- this is only a test
With that in mind, this week I decided to undergo a little layoff drill to try and ascertain exactly how much we'd have to cut back to make ends meet on unemployment benefits alone.
Luckily, the Honeybee and I have been meticulously tracking our monthly expenses since 1999, so we have an excellent handle on exactly where all our income is going.
Anyway, I asked the Honeybee to propose what cuts she would make to our household budget in the event I was laid off. For reasons I will explain later, I purposely failed to give her a target figure to aim for. Meanwhile, I independently made my proposed cuts.
The results are shown in the figures below. As you can see, the Honeybee and I disagreed somewhat -- at least initially -- on the scope and magnitude of the cost-cutting. The Honeybee knocked down our budget by almost half, while I was a bit more draconian, slicing our spending plan by two-thirds.
Although we disagreed on the size of the cuts, neither of us was able or willing to pare the budget to a degree that was sufficient to cover the paltry $2,000 per month that I would be eligible to receive in unemployment benefits.
COBRA: Two steps forward, one step back
For many people, one of the biggest impacts of getting laid off is the loss of employer-provided health benefits. The Consolidated Omnibus Budget Reconciliation Act (COBRA), passed way back in 1986, gives many laid-off employees the option of extending their employer's health care benefits for 18 months.
While that is good news, there's a catch: COBRA can be extremely expensive. You not only have to pay the insurance premium that you paid before you were laid off, but you also have to come up with the amount your former employer was paying for you too, plus an administrative fee of up to 2%.
In my case, that means I'd need to come up with roughly $750 per month to maintain my benefits.
Back to the ant and the grasshopper
On the surface, it might seem as if our family will be in a very tough predicament if I end up losing my job.
Fortunately, I've never forgotten the fable of "The Ant and the Grasshopper." As such, even though I am very well-paid, I have always striven to live well below my means and save up for that dreaded "winter" when I may finally lose my job.
Right now I have more than $50,000 in cash reserves. In the event I am laid off, those reserves will provide a lot of financial flexibility that our household wouldn't have otherwise. (Which is why, for this drill, I was not interested in giving the Honeybee a cost bogey to shoot for.)
- Calculator: Is your budget in balance?
For the sake of argument, let's assume the Honeybee and I agree to split the difference on our budget cuts -- say, $3,500 per month. Add another $750 per month for COBRA and that brings our total monthly expenses to $4,250. So, in order to pay all the bills, we would need to draw down our savings by $2,250, after drawing unemployment benefits of $2,000 per month. At that rate, our emergency savings would last quite a long time, regardless of how long I was able to draw unemployment benefits -- and those reserves would last even longer if the Honeybee took a temporary job.
The moral of the story
Don't be a grasshopper and fool yourself into believing unemployment benefits will be sufficient to sustain you if you lose your job. For most households they won't be.
I can't imagine the upheaval that our family would face if I were laid off and we didn't have a healthy emergency fund. By having one, though, we'll be able to avoid -- or at least postpone for a relatively long time -- some extremely tough decisions that would have to be made if we were forced to rely on unemployment benefits alone.
I think every household should go through a layoff drill like this. It not only helps hone a plan of attack prior to facing a severe financial challenge like a layoff, but it is also a great indicator of how well you're prepared should such a disaster strike right now.
More from Len Penzo dot Com and MSN Money:
This article offends the crap out of me because of the fact this dilhole is talking about how tight he would be if he were laid off and yet look at all the wasteful spending. $1,100 for entertainment per month! $117 for satellite TV! $140 in a housekeeper? $144 for manicures/pedicures.
$8,000 a month! Are you freaking kidding me. There are soo many people that dont even make $35,000 a year and your expenses are nearly $100,000 a year. Dont talk to me about how to save money until you start calculating the cost of an AVERAGE households expenses.
What next show us how a CEO would fare if he were fired with his $6,000,000 a year expenses on his $12 Million salary?
No job is forever anymore. As part of your layoff drill, remember to always know of at least 3 other places that might have a need for your skills. You might be able to avoid the whole unemployment period altogether like I did.
Oh and and remember to wink and nod in all the right places when they say "We're a team here". That is so 80's.
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