My Friend Got Laid Off Without Emergency Savings. Here's How She Got By

When my friend Sarah lost her job last March, she called me in a panic. Not only was her layoff completely unexpected (she unfortunately got downsized during her company's first round), but she had almost no money in her savings account to fall back on.

At the time, Sarah had about $1,000 in the bank. And that's better than a lot of people are doing. Data released last year from SecureSave found that 63% of Americans couldn't cover a $500 emergency expense. So Sarah was at least in a position where she was able to do that.

However, her $1,000 in savings was only enough to cover about 25% of her expenses for a single month. It couldn't even cover her entire monthly rent. And at the time, she had no idea how long it would take to find a new job.

Thankfully, Sarah didn't go into debt during her unemployment stint because she was granted a pretty generous severance package. But that's not something everyone can fall back on.

A payout that saved the day

Sarah had been with her company for four years before being laid off. That left her eligible for a severance package that equaled four months of her regular pay. She also got a small payout on top of that for accrued vacation time she hadn't taken.

But severance pay isn't guaranteed. In some cases, companies are required to offer some type of severance in the event of mass layoffs. But that doesn't mean every single person who loses their job is entitled to that sort of payout.

Also, the amount of severance being offered often hinges on tenure. Someone new to a job might get a lot less severance pay in the event of a layoff than someone who's been with their company for many years.

On Sarah's end, it took a little over three months to find a new job. And to her credit, she dove into her job search right away, networking like a beast and aggressively putting her resume out there. But she used up almost all of her severance to pay her bills in that interim period of being unemployed. Had it taken her an extra couple of months to find a job, she would've risked landing in debt.

Always have emergency savings to fall back

Sarah got lucky in that she was entitled to severance pay in the first place, and got enough of it to cover her living costs while she was out of work. But getting severance isn't a given. So that's why it's really important to build a solid emergency fund so you have a means of paying your bills if you're laid off unexpectedly.

As far as how much to save goes, the general convention is that it's wise to sock away enough money in emergency savings to cover a minimum of three months of essential expenses. But think about your role and industry, and what the typical process for getting hired is. If you know people in your field who were searching and interviewing for jobs for five months before getting an offer, you may want to consider saving more like six months' worth of living expenses.

Your personal financial circumstances should also dictate what your emergency fund looks like. If you're on a month-to-month lease and could, in a worst-case scenario, give your landlord 30 days' notice and move back home while unemployed, you may be OK to only save three months' worth of expenses in your emergency fund. If you're on the hook for a mortgage, you may want to aim a lot higher.

Even since getting settled into her new job, Sarah has been diligently adding to her emergency fund to eventually save enough to pay her bills for six months. If you don't have much in the way of emergency savings in the bank, definitely try to boost your cash reserves.

Layoffs have a way of happening unexpectedly. And you really don't want to risk racking up piles of debt due to losing your job through no fault of your own and not having adequate savings to fall back on.