Managing Frictional Unemployment

Introduction

Just the word “unemployment” on its own can bring up a lot of negative feelings.

And that’s totally fair. The sudden, unexpected unemployment that comes with being laid off can be one of the most stressful times in someone’s life.

But how about when someone chooses to leave their job to spend time finding a better opportunity? That’s a little different.

Frictional unemployment refers to the temporary unemployment between voluntarily leaving a job and finding another. The term also applies to returning to the job market after a long absence or entering the workforce for the first time, perhaps after graduation or training.

Frictional unemployment can be considered a sign of a healthy economy, as it signals that workers are confident or financially stable enough to leave a job and find a better one. But healthy for the economy doesn’t mean challenge-free for individuals.

If you’re considering a change like this, let’s explore what frictional unemployment could mean for you and your finances.

How Frictional Unemployment Impacts Your Finances

Any form of unemployment can cause stress and have an impact on your financial life, even if it’s voluntary and temporary. Before you leave a job to find a new one, you should consider the ramifications.

Temporary lack of income

The biggest and most immediate impact is that you can no longer count on your paycheck. And generally speaking, you won’t qualify for unemployment benefits if you voluntarily leave a job. It’s important to have savings and a plan going into this.

Essential expenses

On the flipside, your paycheck might have stopped coming in, but your bills certainly won’t.

You can typically cut back on dining out, entertainment and other optional spending, but not rent or mortgage, utilities, groceries, and other essentials. Making a budget ahead of time can help you identify your wants and needs, so you can prioritize accordingly.

Emotional and credit score stress

Any period of unemployment can be a time of uncertainty. There’s a chance it takes longer than expected to find the right job. Or there could be a shift in your industry or the overall job market. All sorts of factors can cause an emotional toll while your search goes on.

And there can be a financial impact, too. If the job hunt goes longer than expected, your credit card balances may start to creep up, which can lower your credit score. And if that leads to late or missed payments, those can bring your score down even further. Again, planning and budgeting are essential if you want to avoid hurting your credit.

Financial Tips To Prepare for a Job Change

Planning ahead for the period between jobs can be the difference between feeling confident and feeling stressed.

Review and adjust your monthly budget

A budget is the most helpful tool when planning for unemployment. You want to carefully think about what you spend in that time, since you won’t have regular income coming in to replenish things.

If you don’t already use a budget, it may be worth learning about different budgeting systems that can help you prioritize the money you earn and spend.

If you have enough time before leaving your job, you may even want to fine-tune your budget to focus on things like savings and debt repayment. This can really help you prepare for the big change.

Build or replenish your emergency fund

An incredibly helpful tool for weathering unemployment is a dedicated emergency fund.

Saving for an emergency, even if you only set aside a little bit each pay period, is just a good financial habit. One of the easiest ways to do this is to automatically deposit part of your paycheck into a savings account. A high-yield savings account works especially well for this, since it can earn relatively higher interest and help your emergency fund grow.

Reduce high-interest debt before leaving

If you have any loans, credit card balances or other high-interest debt, try to pay them off — or at least reduce them — while you still have regular income. It may be worth looking into a debt reduction strategy to help you find the best approach.

High interest rates will make your debt continue to grow while you look for a job. If the search takes longer than expected, or an emergency comes up, you don’t want these balances looming in the background.

Using Credit Cards Responsibly During Job Transitions

You may want to spend some time considering whether it’s worth taking the leap without a new job lined up. 

Let’s say you leave one job to find one that improves your quality of life. If it takes a while, you may take on some credit card debt.  It would be a shame if that quality of life improvement is dampened by debt that you accumulated during the gap.

But if you feel that leaving is the right move, it’s good to have a plan about how and when you use credit cards.

Cover essential expenses only

If you only use your credit card to pay for essential expenses — especially after you’ve crafted a solid, realistic budget — you’ll be less likely to overspend and take on extra debt. 

Avoid carrying a balance if possible

With any credit card, you should make at least the minimum payment on time, every time. But if you want to avoid interest, it’s a good idea to pay the full statement balance.

If you pay less than the full amount, you’ll carry the remaining balance to the next month, and it will be subject to interest. If possible, prioritize paying the statement balance every month, so your debt doesn’t grow while you look for your next job.

Use credit to protect your savings

For one reason or another, an emergency may come up and you absolutely need to use your credit card. Maybe something happens that would wipe out your savings, but you already have several job offers on the table, so you feel secure in using your credit card for the time being. You might weigh potential interest charges against the peace of mind you’d have of not using up your savings.

 Using a credit card instead of savings can be a last resort, a tactical choice, or a little bit of both.

Understand your card’s APR and benefits

Being familiar with your credit card’s features can help you use it wisely. It’s especially good to know the APR (annual percentage rate), since this gives you a starting point to calculate how much interest you’ll pay for carrying a balance.

And if your card comes with extra benefits, you can put them to use between jobs. A card with cash back rewards can soften the blow of your expenses, while a travel-focused card that offers points can be welcome if you have to travel for interviews.

Bottom Line

Any period of unemployment can be tough on finances. And even though frictional unemployment generally happens by choice, that doesn’t mean it’s a walk in the park.

But with a combination of preparation, thoughtful credit use and sticking to your plan, you can make it through the time between jobs with confidence and peace of mind.