Many people have found themselves out of work during this pandemic and must navigate unemployment benefits for the first time in their lives. If you are newly out of work, figuring out how to revise the way you manage finances can be overwhelming. Here is a step-by-step guide on how to best manage your unemployment benefits to get you through these difficult times.
UNDERSTAND YOUR UNEMPLOYMENT BENEFITS
Before all else, you must understand how unemployment benefits work. The U.S. Labor Department manages unemployment insurance and while states typically ensure partial wage coverage for up to 26 weeks, each state has individual rules that dictate benefit amounts and administration.
Regular state benefits typically average ~$390 per week, but this has increased during the pandemic. The initial CARES Act gave $600 in additional weekly benefits for unemployment recipients (March-July 2020). Most recently, the American Rescue Plan extended $300 in additional weekly benefits that had begun in December 2020. Eligible recipients should be sure to follow their states rules and claim weekly benefits.
DECIDE ON TAX WITHHOLDING
Many people forget that unemployment benefits are federal taxable income. When filing for benefits, you can choose automatic 10% tax withholding. If you anticipate some financial flexibility, then automatic withholding is a good option, but if you anticipate limited flexibility, then foregoing withholding is the better option, especially if it means avoiding high expense loans. Of course, you will owe taxes eventually, but the hope is that you will have either had enough time to get back on your feet or you can pursue IRS tax-repayment breaks or payment plan adjustments.
REVISE SPENDING PATTERNS
Revising your spending patterns is crucial when dealing with limited finances. You should use unemployment benefits to fund your immediate, short-term needs while also adjusting your spending habits as possible. For example:
- Groceries – buy essentials, but choose lower-cost grocery stores or wholesalers
- Health Insurance – pay for coverage, but opt for lower-cost, in-network visits
- Rent / Mortgage – meet the required payments, but ask your landlord about revised payment schedules or look into payment delay and reduction options for federally-backed mortgages
- Utilities – pay your bills, but monitor water and electricity consumption, heat and air conditioning usage, etc.
Cutting out non-essential items (e.g. cable, streaming, memberships) will free up funds to cover essentials, but if you are still not able to do so with unemployment benefits, try pursuing a hardship agreement through your credit card company or bank.
ADD TO YOUR RAINY DAY FUND
If you have been able to cover your basic expenses, add your leftover unemployment benefits to an emergency “rainy day” fund. There is always the risk that unexpected expenses arise that will require funds over and above what you receive through unemployment benefits. Steadily adding to an emergency fund, even if just a few dollars here and there, can really save the day.
PAY OFF YOUR MOST EXPENSIVE DEBT
If you have managed to cover your basic expenses and set aside a reasonable amount of money in your rainy day fund, you can direct leftover unemployment benefits toward paying off your most expensive debt. High-interest debts like credit cards and certain personal loans should be paid off first.
Overall, you should focus on the essentials before directing unemployment benefits anywhere else. Prioritizing the near-term necessities will help you to push forward and get back on your feet. Navigating unemployment benefits can be stressful, but following these basic guidelines can help you to better manage and prioritize.