Tuesday, November 4, 2008

Stay On After A Lay Off

The folding up of Lehman Brothers has highlighted the role of planning in dealing with sudden layoffs. Seven-step way to financial security for employees.

On Friday, 13 September, when Rohit Kumar (name changed) wound up work and left for home, he knew that his employer, Lehman Brothers, was in a spot of trouble.

However, over the week, as rumours got stronger and stronger, his bosses in his office in Powai, Mumbai, assured him that the India unit would not be affected. “We were told that none of this would affect us, Barclays or someone would buy the parent company over and our life would go on as usual. We were not misled by our bosses, this is what they believed as well,” he says. Reassured, Kumar went home looking forward to a relaxing weekend.

On Sunday night, his phone rang. It was a colleague who asked him to watch CNN. The company had filed for bankruptcy, the TV news showed employees trooping out of the US office carrying boxes of their personal belongings. Kumar sat up and watched the news unfold all night.

“Even on Monday morning, when I drove to work, I expected that my job would still be safe. I was anxious, but I wasn’t panicking. Maybe I was in denial,” he says. But once in office, there was only despondency and gloom. Everybody knew the game was up and no one knew what to tell the other person.

Loan load. The first worry for Kumar was his home loan. He had bought a house in Mumbai in 2006. After seven years with his previous employer, Kumar had signed the appointment letter from Lehman. There was a fat joining bonus and 60 per cent jump in his salary and even though real estate prices were high, the EMI seemed well within his new budget. “My wife also works, but her salary does not even cover the EMI, much less our monthly expense,” he says. For now, Kumar is desperately seeking job options elsewhere. His company has said that it would pay the salaries of its employees till 31 October.

Job search constraints. “There are two problems now,” says Kumar. “One, with the meltdown in the financial services space, jobs are hard to come by, so it is going to take me longer to find an equivalent job. And two, future employers are all aware of our situation, so we have very little space for negotiating a good salary package. They know we are desperate.”

Fund value. It is important that we set aside a contingency fund of three to six months’ living expenses. But, warm in the cocoon of a secure job and stable life, most of us often ignore this step. In Kumar’s case, his EMI is substantial and he does not have liquid funds beyond his salary.

Security Blankets

Be your own FM. Financial experts say the first thing to do while preparing a strategy for a sudden layoff is to make a survival budget. Kumar expects it will be at least five months before he starts his new job. His wife’s salary can cover their basic expenses like food, transport, electricity and water bills.

Health cover—for you, by you. “If you are laid off suddenly, there are steps you need to take,” says Gaurav Mashruwala, director, ACE, a Mumbai-based financial planner. “Some of these are important and some are urgent. Getting a health cover is both urgent and important. Most salaried people depend on the medical policy offered by their employer and do not see a need for an additional health cover. If you are unemployed for a while, there is nothing more debilitating than having to spend all your money or borrowing to pay for medical expenses in case you fall ill.”

Portfolio management. The next step is to look at your investments. If you have an equity portfolio, you may have to liquidate a part of it. Says Mashruwala, “If you have debt, then in times like this you will have to liquidate your equity. Keep funds aside for the next six months’ expenses and use the rest towards part-prepayment of your loan.” With stockmarkets losing considerable ground in the last nine months, this might seem like an option loaded with losses, but you have to focus on your immediate concerns and sacrifice long-term wealth creation. If you are confident that you would be able to find a job in the next few months, then only liquidate to cover expenses and EMIs until then.

You should also relook at your debt instruments. If you have fixed deposits, try and reallocate these to schemes that offer monthly interest payout. Certain bank and post-office schemes offer this option.

Seconds to go. If you do not have enough equity to cash in and see you through the next few months, then you will have to think about cashing in on some other assets. If you have two cars, you could sell one off. Or if you have invested in a second home or plot of land, you could liquidate these and use the funds to see you through the next few months and use the remaining to pay off your loans.

Gold glitters.
If you have invested in gold, then this is a good time to cash in on that. Gold prices are very high and the money would come in handy.

No credit on card. Tempted as you might be, do not use your credit card as a loan mechanism. Use the credit card sparingly and pay off your entire dues. If you are really strapped for cash, you can take a loan from close family members or opt for a personal loan from a bank. The last thing you want chasing you at this stressful time is sky-high interest payment on credit card dues.

Lesson from Lehman. What is happening to financial services employees around the world has once again highlighted the importance of contingency planning. Like Kumar, no one expects we will lose our jobs overnight. It is not impossible anymore that companies that have survived decades (and in Lehman’s case, centuries) crumble into nothing overnight. Building a contingency reserve and setting aside money for the next six months will save us not just a little anxiety but also the desperation associated with finding the next job. You can wait for the right offer to come along and negotiate a little better if you have the confidence of that money in your bank account.

Steps To Take If You Have Been Recently Laid Off

Buy a health insurance policy if you don’t have one

See how many months’ expenses you have in liquid form

Assess EMI payouts and unavoidable expenses

Cash equities if you are falling short

Rejig(Re-equip) debt investments, move to those that pay out monthly income

If you have gold, sell it

Sell second car, second house, if necessary

Never use your credit card as a loan mechanism

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