How Can You Budget Your Unemployment Income?

In both good economic times and bad, roughly 60% to 80% of American households live paycheck-to-paycheck. This means any financial bump in the road can send the household budget way beyond the edge of the road and off into the weeds.

A budget is nothing more than a plan for spending money during the upcoming month. Even when unemployed, you will likely receive financial assistance that you should still plan or budget for. When household income decreases during periods of unemployment, plan your expenses for the month and consider how to prioritize them. As needed, reduce or eliminate your lowest priority spending, working your way up your priority list until your income covers all planned expenses.

As you read through this post, consider using our Unemployment Budget calculator included here on the side.

Financially Preparing for Unemployment

Without emergency savings funds, households that face unemployment suddenly find themselves in emergency financial lockdown mode, having to focus more on cutting expenses, canceling contracts, and taking ANY income opportunity that comes along rather than strategically working to find employment that best fits their experience, education, needs, and goals. Having an emergency savings fund not only helps pay for immediate needs and wants. It also relieves the pressure of taking any offer that provides income, meaning you can focus on researching and applying for jobs that will pay better over the long run and provide higher job satisfaction.

How much should you have in your emergency savings fund? One long-time rule of thumb suggested by HR professionals indicates that for every $25,000 you earn annually, you will need one month to find your next job with a comparable income. This suggests that the more income you earn, the longer it will take for you to find your next job of similar pay. Taken further, you should save one month’s worth of critical living expenses (housing, food, transportation, communications) for each month you could potentially find yourself on the unemployment rolls.

The resulting amount would allow you to pay your most important bills stress-free while you go about your job-hunting activities. Consider using Money Fit’s Emergency Savings Fund calculator to help you figure out a target savings goal.

Qualifying for Unemployment Income

Unfortunately, some individuals who exit their jobs and think that unemployment will get them through until they find another job might discover they don’t qualify for unemployment income. Each state sets its own qualifications and manages its program differently, but generally, you can count on at least the following three eligibility requirements:

Above-board Employment

Not surprisingly, if you have worked for someone off the record and who has been paying you “under the table,” you should not expect to qualify for unemployment income. The reason why so-called employers pay their workers under the table is to avoid paying unemployment insurance (the policy to fund your unemployment income).

With no unemployment insurance policy in place with your employer, you have no access to unemployment insurance after leaving that job. By the time you lose such employment, it can feel like you’re out of luck as far as unemployment coverage goes. Still, in the slim chance your employer paid you in cash and somehow still paid unemployment and income tax for you, you could request a wage statement.

If such a request meets a blank stare from your former employer, you’re probably out of luck. To help others avoid the same nightmare scenario in the future, you might consider filing a complaint against the employer with the US Department of Labor.

Fired or Otherwise Dismissed without Cause

If your employer dismissed you for reasons beyond your control (e,g, general downsizing, elimination of your position, or your boss’s impulse), you can generally expect to qualify for unemployment.

However, if your employer dismissed you for certain behavioral issues, you might just find yourself ineligible for unemployment income. According to Nolo.com and USChamber.com, a few such behaviors include:

• Criminal behavior on the job

• Embezzlement or theft against the company

• Endangering others carelessly or repeatedly

• Excessive absenteeism

• Failing tests for alcohol or drug use. Refusing to take these tests can also disqualify you for unemployment benefits in some states.

• Repeated and documented violations of company policies

• Sexually harassing coworkers or clients

Quitting with Cause

Usually, if you quit your job, you will not qualify to receive unemployment income. However, in cases where you quit for allowable reasons, you might remain eligible for these benefits. Such causes typically involve the following:

• You were the victim of sexual harassment from a coworker or manager

• You were subject to severe and/or repeated unsafe working conditions

• Your employer asked you to break the law (which includes falsifying records)

Additionally, many states allow former employees to collect unemployment if an illness, injury, or disability forced them to quit or if the employee felt compelled to relocate because of domestic violence. A few states even consider the good cause to include moving out of the area because a spouse changes employment.

Estimating Your Unemployment Income

Each state, district, and territory use its own calculation to determine the amount of unemployment income to offer its eligible citizens. As of 2020, a few states provide a maximum weekly benefit of less than $250 regardless of household size and dependents (approximately $1,083 per month), not including rare federal supplemental additions,  while several offer $800 or more a week based on the number of household dependents (approximately $3,467 a month). That equates to 300% more than in the less generous states.

Most states offer their unemployment for as much as six months while others provide it for less than three months.

With such variations, you can understand how difficult it is to provide a reliable estimate of your potential unemployment benefit. Additionally, during times of natural or economic disasters (e.g. the Great Recession and COVID), the federal government has sometimes stepped in to increase the amount of the benefit, the length of the benefit’s availability, or both.

As a very general rule of thumb, you can estimate your unemployment by averaging your weekly earnings over the past year and multiplying that by 50%. Then, take the lessor of that result or your state’s maximum benefit to approximate your weekly unemployment benefit.

Prioritizing Your Monthly Expenses

As soon as you enter a period of unemployment, you should take care of the critical financial step of prioritizing your monthly expenses. List them in the following categories:

1. Survival Needs: List all expenses required for survival, that you could not live long without. These typically include housing (and utilities), groceries, and healthcare

2. Critical Wants: List household expenses central to your lifestyle, including transportation costs, childcare, communications bills (Internet and phone), and minimum debt payments.

3. Lifestyle Choices: List purchases and bills such as dining out, club and gym memberships, storage unit fees, media streaming, and other subscription services.

4. Trivial Expenses: List purchases you can easily do without for weeks or months at a time, including new clothing and accessories, entertainment, donations, tattoos, technology upgrades, vending machine purchases, and buying video games.

5. Future Dreams and Goals: List activities like contributions to emergency savings, long-term investment accounts, and short-term savings accounts for things like vacations, holiday and birthday gift-giving, and furniture replacement.

Once you have prioritized your regular spending, you will find yourself much better prepared to identify opportunities to adjust your expenses as needed during this time of limited income.

Adjusting Your Monthly Purchases

After prioritizing your expenses, your next budgeting step involves adding up all your estimated monthly purchases and bills. If this total surpasses your projected unemployment benefit, you should consider eliminating all expenses in category #5. If your expenses still exceed your income, eliminate your category #4 expenses.

If you must consider removing category #3 expenses, you should expect to spend time working with service and subscription providers as you attempt to cancel or change your contracts and agreements. Be careful not to break contracts that could result in large penalty fees or in the provider charging you the remaining balance of your annual contract.

Minimizing your category #2 expenses may require great sacrifice, from selling cell phone devices and downgrading cellular service to seeing your credit rating suffer due to late payments to surrendering your vehicle.

Addressing unaffordable category #1 expenses may actually involve government programs to minimize the likelihood of you doing without survival needs. These programs include the federal SNAP program (Supplemental Nutrition Assistance Program, or food stamps), state Medicaid services, and utility company payment moratoria and subsidies.

All these adjustments often need to happen to prevent the worst possible outcome of losing your home to foreclosure or having the property manager evict you from your apartment. You need to prioritize your efforts to keep your housing because of the stability it provides you during your job search and anyone else in your household for the physical and emotional security it offers.

Reemployment and Finances

Once you have found stable and sufficient income to replace your lost wages, exert all your energies to minimize the chance of overspending. Human nature can lead you to not just celebrate your new good fortune after weeks or, more likely, months of struggling but to revel in excess. Too many newly reemployed consumers run to a dealership to get a brand-new vehicle, apply for a mortgage to move to a nicer neighborhood, or take a seemingly long-overdue vacation.

If you can exit unemployment without increased debt (more amazing yet, with no debt at all) and adequate cash reserves still in your savings accounts, you might find it relatively easy to justify such celebrations. Otherwise, you would do well to delay celebrating until you have made significant progress against your consumer debt(s) and in rebuilding your emergency savings fund.

Related Questions

Can you make too much money to qualify for unemployment?

No. Most state policies base their unemployment benefits calculations on wages paid over the previous four to five quarters. If your earnings came from wages and not unearned income and did not come within a single quarter, most states likely qualify you as eligible regardless of income size, though most have a minimum income requirement.

How does unemployment affect your income tax?

The government considers unemployment to be taxable income. At the end of the year, you will receive a 1099-G tax form from the state unemployment office, noting the amount of unemployment income you earned. Alternatively, you can have up to 10% of each unemployment check withheld in taxes.