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How to rebuild finances after losing a job and finding another

Catching up with retirement planning and bills

By Eileen Ambrose, The Baltimore Sun

June 19, 2011

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Ever so slowly, the unemployed are getting hired. And if you're one of them, the next task will be to get your finances back on track.

The latest government figures show that the median length of unemployment is 51/2 months — enough time without a paycheck to do a lot of damage. By then, you might have wiped out savings, dipped into retirement accounts or racked up credit card debt. Your credit record could be tarnished if you were late paying bills or defaulted.

Getting back on sound financial footing will take some time — and a switch in mind-set.

"It's going from hunkering down to survival mode to getting back to planning for the future," says Christopher Brown, a Rockville financial planner.

Alan Birkelbach is doing just that after re-entering the work force last month. The 55-year-old computer analyst from Plano, Texas, was laid off in November after 23 years with his employer. His wife, a telecommunications engineer who has been on disability, lost her job the year before.

Their income following the layoffs — disability insurance, unemployment benefits and severance — was at least half what it was before, Birkelbach says.

The pair immediately cut expenses. "More beans instead of steaks. No vacations. We didn't go to the movies much," he says.

His new job pays around $80,000, or 10 percent less than he used to make. Even with a steady income, though, the two continue to watch their spending.

"It would have been easy to snap back like a rubber band, to go back to the old standard of living," Birkelbach says. But unemployment isn't something the couple will forget soon.

"It slapped us in the face, very effectively, that things are fragile and they can change at a moment's notice," he says.

If you've recently been rehired, here are some steps to get finances back in shape:

New job, new budget "Put together a budget as quickly as possible," advises Derrick Kinney, a financial adviser in Arlington, Texas. "It's important to make sure your budget fits your salary."

Indeed, you won't be able to use your old budget if the new job pays less than you earned before.

Replenish emergency fund Building up a cash cushion worth three to six months' worth of living expenses must be the top priority.

"If they don't build that emergency reserve and something happens with their new job, they will have no fallback position," says Grace Worley, an Indianapolis financial planner.

Pay off credit cards If you have card debt to repay, it's best for your wallet to tackle the balance with the highest interest rate first while keeping up with the minimum payments on the others.

But it's more rewarding psychologically for some people to pay off the smallest balances first. That way they wipe out some bills quickly and feel as if they are making progress.

The most important thing is that you continue chipping away at your debt, so choose the method that is most likely to keep you on course, Kinney says.

Save for retirement Enroll as soon as possible in your new employer's retirement plan. It might be difficult at first to save the maximum limit while, say, rebuilding an emergency fund, but contribute at least enough to get the employer match.

The last couple of years have been good in the stock market, and those who had been sitting on the sidelines might be tempted to catch up on retirement savings by investing aggressively in equities. But that's risky because stock prices can suddenly plunge. Remember 2008?

A more prudent way to catch up is to save more. If you turned 50 since losing your job, you now are eligible for catch-up contributions to a 401(k) or similar plan, Rockville planner Brown notes. Older workers can put away up to $22,000 a year in a 401(k), or $5,500 more than younger colleagues.

Also, check out online calculators, such as T. Rowe Price's Retirement Income Calculator, to see the impact the job loss had on your future retirement.

Birkelbach says he and his wife made an effort to save for retirement during their layoffs, although they saved much less than before. Still, the loss of income will add at least a couple of years to his previous retirement date, Birkelbach says.

Consider a line of credit A home equity line of credit allows you to borrow against the equity in your house — if you still have some.

You need to have a job to qualify for the credit line, Brown says. Now that you're working again, he says, you should establish a line of credit that you can use in emergencies. You can keep the line open for years without using it and will pay interest only when you tap it.

Be aware, since the credit crisis of 2008 the standards for getting a line of credit are more stringent. And, depending on the lender, you might have to pay certain fees. So shop around.

Pull credit reports Find out the damage unemployment did to your credit by getting your credit reports from the three major credit bureaus. Get a free copies at annualcreditreport.com or by calling 1-877-322-8228. Correct any inaccuracies.

Avoid credit repair schemes promising to clean up your record for a fee. "Whatever they charge is too much" because you can do the job yourself for free, says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling.

To restore good credit, repay debt and make sure you consistently pay bills on time.

"There is no silver bullet. There is no fast track," Cunningham says. "But know that the farther you move away from your financial distress, the less impact it has."

You also might have to reapply for a credit card if an issuer dropped you. Online sources, such as Credit.com, CreditCard.com or CardRatings.com, can help you find a card that fits you.

If your application is rejected, try once more with another card, Cunningham says. But don't fill out a flood of applications, which will make you appear desperate and hurt your credit record, she says.

If you can't qualify for a regular credit card, consider a secured card. You put money in the bank issuing the card, and the amount of the deposit serves as your credit limit. Once you show a track record of paying on time, you could qualify for a regular credit card.

Avoid splurging Resist the temptation to treat yourself to a big purchase now that money is rolling in again.

"Do something smaller but gratifying, as opposed to taking the family on a vacation that they have not had, finally redoing the kitchen or buying that new car," Worley says. "Taking everyone out to a nice dinner, fine."

For Birkelbach, small pleasures are enough.

"We go to movies more. It's a tiny luxury," he says. "Even then, we are still going to the dollar movie as opposed to the first-run movies."

eileen.ambrose@baltsun.com

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