In this environment, Early Show resident financial expert Ray Martin encourages everyone to be prepared to be laid off, or even for his or her company to fail.
Even if you're not worried about your job, you should be prepared for the economy to get worse before it gets better and the impact that could have on your pocketbook, Martin advises.
On The Early Show Thursday, Martin laid out his "defensive playbook" for surviving a bad economy:
Some people are worried about losing their jobs. Others are worried about paying rising heating bills, on top of high food and gas prices.
"We bore everybody to tears talking about emergency funds," Martin says, "but this is exactly what we're talking about. You need an emergency fund at times like this."
If you don't already have three-to-six months' worth of expenses tucked safely away, you need to focus all of your financial energies on making that happen NOW.
--Decrease your 401(k) plan contributions to the minimum required to collect your employer's company match (typically six percent of your pre-tax pay). The increase in net pay should be used to build up your emergency fund.
--Eliminate all unnecessary payroll deductions, such as savings bonds or charitable contributions. Use this cash to bolster your savings.
--Reduce your income tax withholding from your pay, especially if you typically receive a tax refund. Over 70 percent of all tax filers -- about 95 million Americans -- receive a tax refund each year. The average refund is more than $2,500. A large tax refund may feel good, but larger take-home paychecks NOW will help you to build your cash cushion more quickly.
PROTECT YOUR PORFOLIO
If you have an outstanding loan from your 401(k), make a plan to pay it off as soon as possible. If you lose your job, most plans require you to repay it within 30 days of termination. Otherwise, they treat the loan amount as a taxable distribution. That creates a tax and penalty ambush for an unsuspecting and unfortunate worker, because income taxes and early withdrawal penalties will be assessed on the amount of your loan if you are under age 59-1/2. If possible, try to pay off these loans from other sources.
Obviously, if you are laid off or your company goes bankrupt, you'll lose further employer contributions to your retirement funds. However, you won't lose the money in those accounts: Federal laws protect your savings.
One caveat: If you have a large portion of your retirement savings in company stock and your company fails, you're set up to lose a lot of cash, and the government does not protect your lack of financial planning. Employed or not, now more than ever, you want to spread your risk out among stocks, bonds and cash.
Finally, because you likely won't be making retirement contributions if you're laid off, it's more important than ever to continue contributing while you can. Don't let the bad economy scare you into stopping your savings plan altogether while you're still employed.
--Diversify, diversify, diversify
--Pay off any 401(k) loans
A big concern for workers facing unemployment is what happens to their health insurance.
If you're married, an easy solution is to become covered under your working spouse's plan.
If that isn't an option for you, see if you're eligible for continued coverage under COBRA (short for a federal law called the Consolidated Omnibus Budget Reconciliation Act). It enables you to buy individual health coverage at your former company's group rate for up to 18 months after you're laid off, assuming your company has more than 20 employees.
If your company files for Chapter 11 bankruptcy, meaning it's going to restructure and stay in business, your coverage may remain unchanged. If you're laid off as a result of the bankruptcy, you're still eligable for COBRA.
--If you are employed in the financial field or another "risky" area, switch to your spouse's insurance plan now. Since most companies are in the middle of their annual open enrollment period, now is an easy time to do it.
--Contact your human resources department and ask if your insurance will be continued or terminated. Find out NOW, so you know what to expect and how to proceed if you lose your job.
Life insurance is another concern. If you lose you're job, you'll also lose the life insurance supplied by your employer. Here's the GOOD news: You may be able to get cheaper term insurance on your own. Companies guarantee employees' life insurance so, no matter your sex, your age, or your health, you'll have coverage, and you'll pay the same as your colleagues. Thus, this "group rate" is a combination of expensive and less-expensive life insurance (expensive insurance to cover older, less healthy employees; less expensive insurance to cover everyone else).
--Check into buying your own term life insurance online; you'll likely get a cheaper rate, especially if you're young and healthy.