Imagine this: You’re eating a burrito, enjoying your side of guac, when suddenly you take a bite into the spiciest jalapeno of your life. Your mouth burns, your eyes water, and you’re pretty sure you need to call the fire department ASAP.
That’s kinda what getting laid off is like. You’re chomping along, enjoying daily routine, when suddenly everything changes. Now, it’s not your mouth that’s getting burned, it’s your finances. And you’re wondering, “How am I going to afford my rent…much less a burrito?”
Most people don’t think unemployment can happen to them…until it happens to them. Then they’re scrambling to figure out how to cover their bills while looking for a new job. And if you’re thinking, “Aren’t unemployment rates dropping?” you should know that as of May 2019, there were still 5.9 million unemployed people in the United States. Unemployment is definitely not a thing of the past.
In fact, with unemployment rates at their lowest, more and more people might start to feel too comfortable and put off preparing their finances for unemployment. That’s a mistake.
But can’t I just collect unemployment checks from the state?
You can but public unemployment insurance isn’t going to be enough to fully supplement your income. On average, public unemployment only covers half of a person’s wages and maximum weekly payouts range from $300-$600 a week.
That might sound like a lot, but when you’re unemployed you’re responsible for your own health insurance. Private health insurance, even COBRA, is expensive with the average family plan costing $1,635 per month and single individual plans costing $535 per month. That’s going to take a hearty bite out of your unemployment checks.
So, if public unemployment isn’t going to be enough to get by, what can you do to prepare? Build an unemployment fund.
An unemployment fund is different than an emergency fund because it’s money you’ll use only in the event of unemployment. This means you wouldn’t use it for other things, like medical emergencies or unexpected home repairs. Plus, the money for your unemployment fund can come from sources other than your savings, like private unemployment insurance.
Feeling inspired? Here are three strategies for building your unemployment fund:
Use a high yield savings account
When your money sits in a regular savings account it’s is on vacation. It’s chilling at the beach, sipping on pina coladas, and posting selfies. In other words, not doing much.
But, when your money is in a high yield savings account, it’s working for you all the time. High yield savings accounts earn interest at a higher rate than regular savings while keeping your money accessible. There are no restrictions on when and how you withdraw the money- when you need it, it’ll be there.
But, unlike traditional savings accounts which yield about .01 — .1% in interest, high yield savings accounts can yield up to 2% in interest. What does this look like in real life? Let’s say you save a $100 a month. Here’s how your balance would grow:
*Traditional savings assumes a .05% interest rate. HYS assumes a 2% interest rate.
In five years, you would save $297 more just from having your money in a high yield savings account. That’s enough to make you want to celebrate…with a pina colada on the beach, of course.
Automate your savings
It’s really easy to prioritize spending over saving, especially when you’re buying something super cool, like a ticket to the latest Game of Thrones cosplay convention. You know you should be saving, but you can skip a month, right? Sure, until one month turns into two, and two months turns into six, and…you get the picture.
The easiest way to break this cycle is to automate your savings. Automating your savings is as simple as setting up a recurring transfer to your savings the day after you get paid. This way, you’re forced to prioritize your unemployment fund. Plus, your account balance will accurately reflect what you have to spend after saving. Which means you’ll feel totally okay splurging on that dire wolf costume.
Another strategy is to automate your savings to save smaller amounts more often. You can do this by setting up more frequent recurring transactions or by using a savings app. Savings app take out small amounts of money every few days so you barely notice it. These small withdrawals really add up. Last month I saved $200 using savings app and I didn’t even know the money was gone.
Savings apps are a low-maintenance way to add to your overall savings strategy and low risk. Since the money isn’t being invested, rather just set aside for you in small increments, you don’t have to worry about changes in the market affecting your unemployment fund. You just keep doing you and your savings will grow.
Invest in private unemployment savings
Sometimes savings just isn’t going to cut it. Especially if you don’t have extra money to put into savings, are saving for a large purchase, like a downpayment, or just want to be sure that you’re prepared if unemployment disaster strikes.
Services like Otherhood provide monthly income, which is directly deposited into your bank account, just like a paycheck. With Otherhood, you customize your savings plan based on how much you’ll need every month and for how long. This is different than public unemployment insurance, where the state determines how much you get paid, and for how long. With Otherhood you’re in control of your savings.
Starting with just one of these strategies, and building in the others over time prepares you for unemployment without putting an extra strain on your finances. That means the next time you’re at the taqueria you can still splurge on that side of guac….and a churro.