Managing Unemployment Debt Repayment After Reemployment

Debt accumulation is common when people go through a period of unemployment. It’s even more common to feel overwhelmed at how fast credit card debt racks up when you’re unemployed. During unemployment, debt may not have been your priority focus, but as you enter reemployment it’s going to take some strategizing to deal with it. Here’s how to tackle debt accumulation from unemployment.

Give Yourself a Break

First, don’t beat yourself up for the debt accumulation while you were out of work. The important thing when you’re unemployed is to take care of yourself and your family. Debt is temporary and there are ways to take care of it—even if it takes time and effort. The key to debt repayment now that you’re earning again, is to understand what you owe.

Take Stock

Now that you’re going back to work, it’s time to assess your situation and make a plan for paying down your unemployment debt. Start by collecting all relevant financial documents, including bank statements, tax returns, investment statements, loan agreements, and bills. Having these documents on hand will make your assessment more accurate.

Figure out what you owe

Review your outstanding debts, including credit card balances, student loans, car loans, and your mortgage. Note the interest rates, minimum payments, and the total amount owed for each debt. This will help you make a debt repayment plan so you can continue or resume making timely payments to manage your high-interest debts.

Make a budget

Create or update your budget to reflect your new income and expenses.

• Make a comprehensive list of your monthly expenses.
• Categorize your expenses into fixed expenses (for example, rent/mortgage, utilities, childcare) and variable expenses (groceries, entertainment). Include all bills, loan payments, insurance premiums, and discretionary spending.
• Ensure your spending aligns with your income.

Review your insurance coverage

What kind of health and dental coverage do you have with your new job? Learn about and understand the health insurance options your new employer provides. Ensure you have adequate coverage for yourself and any family members.

Check your other insurance policies as well to ensure you have adequate coverage and understand the associated premiums, deductibles, and coverage limits. These include life insurance, auto, and home. If you’re not happy with the policies’ premiums, now may be the time to shop for new coverage.

Consider childcare or eldercare

If you have dependents, consider the cost of childcare or eldercare and how it may affect your budget and work schedule. Explore available resources and subsidies for childcare. If you’re caring for an elderly parent, tap local senior care resources.

Review your retirement allocations and financial goals

If you have retirement accounts (e.g., 401(k), IRA), review their balances, contribution rates, and investment allocations. Find out what kind of retirement benefits your new job offers, and decide if adjustments are necessary to align with your long-term financial goals.

Finally, take some time to define your short-term and long-term financial goals. While your priority may be paying off credit card debt from unemployment, it’s typically worth juggling several financial goals simultaneously. Consider putting some money away to build an emergency fund, save for retirement, or save for a major purchase. Compound interest is your friend when it comes to retirement.

Create a System to Identify Which Unemployment Debts to Pay Off First

But back to that debt accumulation—because it might be all you can think about right now. Creating a system will help you plan what to pay down first so you can get a handle on your unemployment debt and gain some peace of mind. Here’s what to do:

Create a comprehensive list of all your debts

Review your creditor statements and list out the following information for each debt:

• Name of the creditor or lender
• Type of debt (credit card, student loan, mortgage)
• Current outstanding balance
• Interest rate (APR or annual percentage rate)
• Minimum monthly payment

As depressing as it may be to know the amount, add up the outstanding balances of all your debts. This is your total debt load.

Determine your approach for paying off your debts

You can pay down accumulated debt a couple different ways: the debt avalanche method or the snowball method.

Debt avalanche method

Focus on your highest-interest rate debt first, while paying the minimum on all other accounts. Put any money left over toward the account with the highest interest rate until it’s paid off. Then move on to the next highest interest rate. This method will probably save you the most money.

Debt snowball method

Alternatively, focus on paying off the debt with the smallest balance while paying the minimums on your other accounts. Once the first debt is paid off, direct all of your available money (including the amount you were paying toward the now-paid-off debt) to the next smallest balance, and on and on. The debt snowball method gives you a feeling of momentum as those smaller balances are paid off and more money becomes available to put toward the next targeted debt.

Whatever debt repayment method you choose, be sure to track your progress over time by updating your debt list and reviewing how your outstanding balances and interest rates change over time.

Make an Emergency Fund

Even though your goal may be to pay off that high-interest debt as quickly as possible, building an emergency fund (financial cushion) at the same time provides greater financial security. Being able to cope with an unexpected car repair helps you avoid putting the expense on yet another credit card—and it reduces stress.

Another benefit of an emergency fund: If you experience another period of unemployment after reemployment, your emergency fund can bridge the gap between paychecks and cover essential living expenses, reducing further debt accumulation while you search for a new job.

Here’s how to get started:

• Calculate your goal. Figure out the optimum emergency fund amount based on your individual circumstances. A common guideline is to save 3 to 6 months' worth of essential living expenses, but you can adjust the amount based on your comfort level and financial situation. If the idea of saving 3 to 6 months of expenses feels overwhelming, aim for 6 weeks’ worth. If you can only save $25 per month, start there—just get the ball rolling. Single parents should consider saving more since you don’t have a second income for backup.
• Keep the fund separate. To prevent mixing your emergency fund with your regular spending, open a separate savings account specifically designated for emergencies. Consider using a high-yield savings account to earn some interest (just make sure that funds are easy to access quickly when needed).
• Set it and forget it. Set up automatic transfers from your checking account to your emergency fund savings account. Treating your savings as a non-negotiable expense ensures consistent contributions.
• Revisit periodically. Review your budget and identify areas where you can cut back on spending. Redirect the money saved into your emergency fund.

Ask for Help with Debt Repayment

If your income has returned but you’re feeling overburdened with your debt accumulation to the point you’re not sure how you’ll break free, we can help. MMI offers free, online financial analysis and debt management plans to support repayment. We’ll review your debts and your finances and help you find the best possible solution to your unemployment debt problems.