Even if you’re a meticulous budgeter, losing your job can throw your finances for a loop. You must re-evaluate your spending and priorities, which can be especially difficult because losing a job can be emotionally draining. Throughout the COVID-19 pandemic, expanded unemployment benefits have been a lifeline for millions of Americans.
There is no one-size-fits-all solution to making ends meet on an unemployment budget. However, there are some effective strategies for spending your benefits, adjusting your budget, and deciding which expenses to prioritize.
How Unemployment Insurance Works
The unemployment insurance system is overseen by the United States Department of Labor, but each state administers its own program, sets its own rules, and provides the majority of the funding. During normal times, a typical state unemployment program will replace roughly half of your average wages for up to 26 weeks, but benefits can vary greatly.
Note
Before job losses became widespread due to COVID-19, the average weekly unemployment benefit was $387 in February 2020. Mississippi provided the lowest weekly benefit of $215 per week, while Massachusetts provided the highest benefit of $550 per week.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provided unemployed workers with $600 per week in federal funds in addition to their regular state benefits. Around 76% of unemployed workers were eligible to earn more from unemployment than they had from their previous jobs. This weekly supplement will be phased out in July 2020.
In December 2020, a bill to help with unemployment was passed. It supplemented regular state benefits by $300 per week, plus $100 for some self-employed workers, and it was in effect until March 14, 2021.
The American Rescue Plan, which was passed in March, provided an additional $300 per week until September 6, 2021.
First, consider taxes.
Your unemployment benefits are taxable income for federal tax purposes, though this rule was waived in 2020 for unemployment benefits up to $10,200 for those with AGIs of less than $150,000. In the future, you must report any unemployment compensation when filing your tax return. You can choose to have 10% of your benefits withheld for taxes by completing Internal Revenue Service (IRS) Form W-4V. It will not occur unless you request it.
There’s no guarantee that 10% will cover your tax liability, and you can’t choose to have more money withheld. Unemployment benefits are also taxed in 35 states.
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Your benefits are exempt from the payroll taxes that support Social Security and Medicare.
It might make sense to have tax deducted from your benefits if you still have enough money to cover your basic expenses and needs. This will save you some money in the long run. According to Leslie Tayne, a New York-based debt settlement attorney and founder of the Tayne Law Group, not having taxes withheld is often the better option if you’re struggling to pay your bills.
“If receiving untaxed unemployment benefits keeps you from taking out a predatory loan or borrowing money at exorbitant interest rates, it might make sense to avoid withholding and [to owe] money when filing your taxes,” Tayne said.
Even if you can’t afford to pay what you owe at tax time, it’s critical that you file a tax return anyway to avoid additional penalties and interest.
Note
For people who owe taxes, the IRS offers a variety of payment plan adjustments and tax repayment breaks. If your income is equal to or less than 250% of the federal poverty level, it may also waive installment plan setup fees.
Change Your Spending
When creating an unemployment budget, consider which expenses you will need to cover. Tayne recommends ranking expenses from most important to least important. “Food, mortgage and rent payments, utilities, and health insurance are all necessary,” she explained. “If you’ve been paying down credit card debt and are about to lose your job, shift your attention to more important bills and pay the minimum on credit cards if necessary.”
Examine the expenses at the “least important” end of your list and consider what you can do without, such as a gym membership, subscription, or streaming service. Even on basic expenses, such as groceries, you may be able to find ways to save money.
“Think about shopping at low-cost grocery stores in your area, such as Lidl and Aldi,” Tayne advised. “Food staples are frequently much cheaper there than in regular grocery stores.”
Getting groceries from a food pantry or sharing meals with family and friends are also options during difficult times. You may also be able to save money on medications by using a prescription discount card or switching to generics.
Rent should be prioritized.
Rent must be prioritized in your unemployment budget. The Centers for Disease Control and Prevention (CDC) extended a nationwide eviction ban until September 30, 2021, but the United States Supreme Court overruled that extension on August 26, 2021, effectively ending the moratorium. The Court made its decision on the grounds that the CDC had exceeded its authority.
Furthermore, the moratorium had no effect on the accumulation of unpaid rent. It simply stated that tenants could not be evicted for failing to pay during that time period. Landlords could also charge late fees, penalties, and interest for rent that was not paid on time. As the moratorium expired, tenants may have discovered that they owed a mountain of debt to their landlords. Since August 26, landlords have been free to initiate or renew eviction proceedings.
Note
If you live in federally subsidized housing, these rules may not apply to you. In addition, many states have their own programs for low- and moderate-income households that will continue to operate despite the Supreme Court’s federal decision.
Request Hardship Agreements
If your unemployment benefits do not cover all of your bills, contact your bank or credit card company for a hardship agreement. Many banks no longer advertise COVID-19 relief programs, but they may still allow you to spread out or delay payments on an individual basis.
If you are a homeowner affected by COVID-19 and your mortgage is federally backed or insured, you may be able to pause or reduce your payments for up to 360 days.
Note
You will be responsible for making up any mortgage payments that you missed while in forbearance.
Create an Emergency Fund
One of the most common reasons for having an emergency fund is job loss. If you have any money left over after taking care of the necessities, consider putting it toward this rainy day fund before paying more than the minimums on your debt. It will serve as a safety net if your unemployment benefits run out before you find your next job.
Paying off debt is less important than having secure housing, keeping your utilities on, and maintaining adequate food and health care. Saving money now will help you cover these necessities or unexpected expenses without going further into debt.
Concentrate on High-Interest Debt
After you’ve saved three to six months’ worth of expenses, you can turn to your high-interest debt. Put the debts with the highest interest rates first. Most people will be in credit card debt.
In response to the COVID pandemic, the Department of Education suspended payments and interest on student loans until January 31, 2022. This relief has been extended once more until August 31, 2022. Consider using this moratorium to build an emergency fund, then pay down any other debt that is accruing interest if you have federal student loans.
Note
If you have private student loans, contact your servicer to see if they have any hardship programs.
In conclusion
Unemployment benefits are typically meager. For a time, relief measures made benefits more generous than usual, but expanded benefits are still insufficient for some people. If your benefits don’t stretch far enough or last long enough to get you through the crisis, you must request hardship agreements and scrutinize your spending.
