If you’re like many people who are socking away money in a 401(k) retirement plan (good work!), you probably know that early withdrawal of funds can take a financial toll. There are penalties that can be assessed, decreasing what you actually receive of those funds you saved.
But sometimes, life happens. Even though a 401(k) account is designed for retirement saving, you may need extra cash ASAP before you turn age 59½. Because money in your 401(k) account is not subject to federal income taxes until distribution, your 401(k) can lead to taxes as well as an early withdrawal penalty in this situation. Therefore, it may be worth exploring other options.
To answer the question, “what is the penalty for withdrawing from a 401(k)?” read on. You’ll learn:
• How a 401(k) works
• What is the 401(k) early withdrawal penalty
• How you can access cash without using funds from your 401(k) account.
How Does a 401(k) Work?
A 401(k) is an account designed to hold money and investments for retirement. Why does it have such a funky name? Well, it’s named after a line in the tax code that gives the 401(k) its special taxation guidelines. It can be a reminder that rules regarding 401(k) accounts are set by the IRS and generally have to do with taxation.
Essentially, the IRS allows investors to stash a certain amount of money away each year for retirement, without having to pay income taxes on those contributions.
Currently, that contribution maximum amount is $23,000 per year, with additional catch-up contributions of up to $7,500 allowed for those 50 and older. Additionally, the investments within the account are allowed to grow tax-free.
401(k) participants can’t avoid paying income taxes forever, though. When retirees go to pull out money in retirement, they must pay income taxes on the 401(k) amount withdrawn.
So, while you have to pay income taxes eventually, the idea is that maybe you’ll pay a lower effective tax rate as a retired person than as a working person. (Although, none of this is guaranteed because we can’t predict future tax rates.)
The IRS classifies 59½ as the age where a person can begin withdrawing from their 401(k). Before this age and without an exception, it is not possible to do a 401(k) withdrawal without penalty.
💡 Quick Tip: Some lenders can release funds as quickly as the same day your loan is approved. SoFi personal loans offer same-day funding for qualified borrowers.
What is the Penalty for Withdrawing from a 401(k)?
When a 401(k) account holder withdraws money from a 401(k) before age 59½, the IRS may charge a 10% penalty in addition to the ordinary income taxes assessed on the amount.
Unqualified withdrawals from a 401(k) are considered taxable income. Then, the 10% penalty is assessed on top of that. This could result in a hefty penalty.
Is a 401(k) Withdrawal Without Penalty Possible?
There are some exceptions to the 401(k) early withdrawal penalty rule. For example, an exception may be made in such circumstances as:
• A participant has a qualifying event such as a disability or medical expenses and must use 401(k) assets to make payments under a qualified domestic relations order
• Has separated from service during or after the year they reached age 55
• A distribution is made to a beneficiary after the death of the account owner.
Additionally, it may be possible to avoid the 401(k) withdrawal penalty through a method known as the Substantially Equal Periodic Payment (SEPP) rule. These are also called 72(t) distributions.
• To do this, the account owner must agree to withdraw money according to a specific schedule as defined by the IRS.
• The participant must do this for at least five years or until they have reached age 59½.
• Under the 72(t) distribution, a participant will systematically withdraw the total balance of their 401(k). While this is technically an option in some instances, it does mean taking money away from retirement. Consider this while making your ultimate decision.
💡 Quick Tip: In a climate where interest rates are rising, you’re likely better off with a fixed interest rate than a variable rate, even though the variable rate is initially lower. On the flip side, if rates are falling, you may be better off with a variable interest rate.
Alternatives to an Early 401(k) Withdrawal
Because of the steep penalty involved, you may feel inclined to shop around for some alternatives to early 401(k) withdrawal.
Borrowing from Your 401(k)
Participants can consider taking a loan from their active 401(k). The money is removed from the account and charged a rate of interest, which is ultimately paid back into the account. The interest rate is generally one or two points higher than the prime interest rate set by the IRS, but it can vary.
While this loan may come with a competitive interest rate that is repaid to the borrower themself and not a bank, there are some significant downsides.
• First, taking money from a 401(k) account removes that money from being invested in the market. A participant may miss out on the market’s upside and compound returns.
• Though a 401(k) loan might seem like an easy option now, it could put a person’s savings for retirement at risk. It is easy to imagine a scenario where the loan does not get repaid. If the loan is not repaid, the IRS could levy the 10% penalty on the distributed funds.
• Money that is repaid to a 401(k) is done with post-tax money. The money that is borrowed from the 401(k) would have been pre-tax money, so replacing it with money the borrower has already paid taxes on may make a 401(k) loan more expensive than it initially seems.
• If a person were to leave their company before the loan is repaid, the loan would need to be repaid by the time you file your taxes for that year or penalty and income tax could be due. Participants should proceed down this route with caution.
Withdrawing from a Roth IRA
A second option is to consider withdrawing funds from Roth IRA assets. Under IRS rules, any money that is contributed to a Roth IRA can be removed without penalty or taxes after 5 years.
Unlike with a 401(k), income taxes are paid on money that the account holder contributes to the account. Therefore, these funds aren’t taxed when the money is removed. (This only applies to contributions, not investment profits.)
Now, the downside to consider:
• Again, common advice states that removing money from any retirement account should generally be considered a last-resort option. The average person is already behind in saving for retirement, so even Roth IRA funds should only be considered after all other options are exhausted.
Access a Personal Loan
Another option to consider could be a personal loan. An unsecured personal loan can generally be used for any personal reason.
By using a personal loan, the participant is able to avoid a 401(k) early withdrawal penalty and leave all of the money invested within the account to grow uninterrupted.
Some other aspects to consider:
• A personal loan also puts the borrower on an amortized payback schedule that has a defined end-date. Having a defined payback period may be beneficial during debt repayment — it provides a goal, and it is clear how progress is made throughout the life of the loan.
• Compare the set amortization of a personal loan to the revolving debt of a credit card, where it can be quite tempting to add to the balance, even as the person is attempting to pay it off in full.
When charges are added to a credit card, the end-date can be pushed out further, especially in the event that the borrower is only making minimum payments. This is not the case with a personal loan where a lump-sum loan amount is disbursed and paid back within a set timeframe. You may want to consider using a personal loan calculator to compare costs.
The Takeaway
If you withdraw funds from your 401(k) retirement plan before age 59½, you will likely be subject to a 10% early withdrawal penalty as well as taxes. You may have other options available if you need funds, however, such as taking a loan against a 401(k), withdrawing from an IRA account, or securing a personal loan. With all of the above options, it is recommended to map out the cost of each and/or work with a tax advisor or financial advisor to help identify the best course.Ultimately, it will be up to you to research the best option given your needs.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.
SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Forex margin trading is when foreign exchange traders borrow money from their brokers in order to make bigger trades than they would otherwise be able to based on their capital position. Like all margin trading, the risks of forex margin trading are higher, but the practice can also produce higher profits.
Traders who engage in forex margin trading are using leverage as part of their investing strategy.
What Is Forex Margin?
Forex margin is similar to the margin trading used in futures markets. Traders deposit money into a margin account as a good faith deposit, which allows them to open, hold and trade forex using leverage (with their account balance as collateral). This lets the traders control trades worth much more than they would otherwise.
Forex (also known as foreign exchange or FX) is a global trading market in which investors trade national currencies. Forex trading is the largest and most liquid market in the world. Currencies trade in what are called “pairs.” For example, the Euro (EUR) versus the United States dollar (USD) appears as the EUR/USD currency pair with the Euro being the base currency and the USD being the term currency.
Traders use the FX market to hedge against foreign currency and interest rate risk. Geopolitical risks are also managed while speculators take part alongside hedgers. The forex market is both a spot (cash) market and a derivatives market. Forwards, futures, currency swaps, and options trade in the FX market.
How Does Forex Margin Work?
Forex margin works by allowing a trader to hold large positions with a relatively small amount of collateral. When you trade with leverage, you amplify risk and return.
While there is no standard amount of margin in the forex market, it is common for traders to post 1% margin, which allows them to trade $100,000 of notional currency for every $1,000 posted.
For example, let’s say you want to trade forex on margin to speculate on the price of the EUR relative to the USD. You must open an FX trading account with a firm that offers this type of trading. Before trading, you must make a deposit into your margin account.
Let’s assume the broker requires 1% margin to trade EUR/USD. You seek to control $50,000 worth of that currency pair, so you post a deposit of $500. After opening the account and posting margin, you execute a buy order on the EUR/USD pair for $50,000 of notional currency at $1.20 per Euro.
If EUR/USD moves from $1.20 to $1.212, that 1% advance moves your position value from $50,000 to $50,500. Your unrealized profit is $500, or 100% of your initial deposit. If EUR/USD declines 1%, you have an unrealized loss of $500. You could face a margin call or a forced liquidation if prices move against you enough.
💡 Quick Tip: One of the advantages of using a margin account, if you qualify, is that a margin loan gives you the ability to buy more securities. Be sure to understand the terms of the margin account, though, as buying on margin includes the risk of bigger losses.
Forex Margin Requirements
Forex margin requirements vary by broker. Variables such as liquidity and volatility impact the amount of margin you need to trade FX. The less liquid the trading environment and the more volatile the currency pair, the higher your margin requirement will generally be. The broker wants you to be able to trade freely but must balance the credit (or default) risk of its customers. Trading with small margin amounts means you have high leverage.
Typical margin requirements range from 50% on the high end to 0.5% on the low end. Those figures correspond to 2:1 leverage and 200:1 leverage, respectively. Knowing your leverage ratio helps you grasp your account’s risk. Brokers determine forex margin requirements based on your credit profile and how much default risk they want to take on.
Forex Margin Terms
You’ll need to understand forex margin terms to navigate this volatile trading arena:
• Equity: Your account balance after adding current profits and subtracting current losses from your cash
• Margin Requirement: Your required deposit to trade with leverage
• Used margin: Margin set aside to keep existing trades active
• Free margin: Available margin to open new positions
• Margin level in forex: A measure of how well funded your account is. Divide your equity by used margin, then multiply that by 100 to find your margin level in forex.
• Leverage: The use of borrowed capital to enhance returns
• Pip: A measurement representing the smallest unit of value in a currency quote. Pip stands for “percentage in point.”
• Spread: The difference between the bid and ask prices
What Is Margin Level in Forex?
Your margin level in forex is the ratio between equity and used margin. It is a straightforward calculation expressed as a percentage. It is your account’s equity percentage multiplied by 100. If you’re trading a currency pair other than the currency in your account, you may have to also do a currency conversion to determine your forex margin in that denomination.
Margin Level = (Equity / Used Margin) x 100%
For example, if you have $5,000 of equity with $1,000 of margin, then your margin level is 500%. The lower the margin level in forex, the less free margin you have available to trade. If your margin level dips low enough, your broker might issue a margin call or an automatic stop out on your position.
While margin level minimums vary depending on the brokerage firm used, many brokers set a minimum margin level at 100%. That means if your equity is equal to or less than your margin used, you will not be able to open new trades.
Forex Margin Example
Let’s say you wish to go long the USD/JPY currency pair. Assume your account balance is $2,000 and you trade a notional value of $10,000. Also assume the margin requirement on this pair is 5%. Your required margin is the notional value multiplied by the margin requirement.
$500 = $10,000 x .05
Now compare the required margin (which is also your used margin) of $500 to your $2,000 of equity.
Your margin level is $2,000 / $500
400% = ($2,000 / $500) x 100%
Your margin level, 400%, is safely above the 100% minimum margin level in forex to avoid margin calls and automatic liquidation from your broker. You can also open new trades so long as your margin level remains above the 100% minimum.
Pros and Cons of Trading Forex on Margin
There are both benefits and drawbacks to using margin when trading currencies. Here’s a look at some of them.
Pros
Pros of using margin to trade forex include that it can enhance return potential, more buying power means access to many trading opportunities and currency pairs, and that the forex markets are open 24 hours a day, five and a half days a week. Depending on how you like to trade, that can be an attractive feature.
Cons
Some of the downsides of trading forex on margin are that trading with high leverage can quickly lead to big losses and margin calls, trading forex on margin creates more volatility, which can increase stress, and that forex markets are less regulated than some other markets. In short: there’s more risk to take into consideration.
💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.
Is There a Difference Between Leverage and Margin in Forex?
Leverage and margin are similar concepts, but they’re different. One way to think of the differences is that a trader can use margin to increase their leverage. Margin is the tool, and leverage is the force behind the tool, which can be used to potentially increase returns (or losses).
The Takeaway
Currency trading is a liquid market that is open more hours per week than regular stock markets. Forex trading involves posting a margin deposit that allows traders to have exposure to large notional values of a currency. There are advantages and disadvantages to know as well as risks to consider.
If you do have the experience and the risk tolerance to try out trading on margin, you could increase your buying power, take advantage of more investment opportunities, and potentially increase your returns. But don’t forget the risks involved.
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For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.
FAQ
How much margin should you use for Forex trading?
It depends on your comfort level and risk tolerance. If you seek maximum risk, then you might be comfortable with a low margin amount. Those with a lower risk tolerance might prefer to trade with a higher margin deposit. You can typically have a leverage ratio anywhere from 1:1 to 500:1.
What is a bad margin level in Forex trading?
You want to have a forex trading margin level above 100%. A margin percentage any lower means you might not be able to open new trades.
Can you trade Forex without leverage?
Yes, you can trade forex without leverage by only trading with your margin deposit.
What is free margin in forex trading?
Free margin is the amount of money available to open new forex positions. It is your account’s equity after subtracting the margin used.
What is a good margin level in forex?
Generally, a good margin level in forex would be above 100%, but depending on how experienced of a trader you are, it can be much higher.
What does 5% margin mean in forex?
The margin percentage refers to how much cash a trader needs to put down to open a trade. So, if the requirement is 5% margin, a trader must put down 5% of the overall trade amount to open a position.
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*Borrow at 11%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
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A fair credit score falls in the mid-lower range of the credit-scoring spectrum. With the FICO® scoring model, which ranges from 300 to 850, a fair score is 580 to 669.
Fair credit is better than poor credit but below the average credit score. While you’ll likely be able to get a credit card or loan with fair credit, you probably won’t qualify for the most favorable rates and terms.
Read on to learn how fair credit compares with other credit score ranges, the difference having good credit can make, and what you can do to build your credit.
What Is Fair Credit?
What “fair credit” means will depend on the scoring model. With FICO, the most widely used credit scores by lenders in the U.S., fair credit is a score between 580 and 669. With VantageScore®, another popular scoring model, fair credit is a score of 601 to 660.
The fair credit range is above poor credit but below good credit, and is considered to be in the subprime score range.
Credit scores are calculated using information found in your credit reports (you have three, one from each of the major consumer credit bureaus). People typically have multiple, not just one, credit score, and these scores can vary depending on the scoring model and which of your three credit reports the scoring system analyzes. While each score may be slightly different, they typically fall into similar ranges and scoring categories, such as poor, fair, good, and excellent/exceptional.
💡 Quick Tip: A low-interest personal loan from SoFi can help you consolidate your debts, lower your monthly payments, and get you out of debt sooner.
Is Fair Credit Good or Bad?
As the name “fair” implies, this score is okay, but not great. A fair credit score isn’t the lowest category on the FICO chart — that’s the poor credit category, which runs from 300-579. But it’s definitely not the highest either. Above fair credit, there is good credit (670-739), very good credit (740-799), and exceptional credit (800-850).
With a fair credit score, lenders will likely see you as an above-average risk and, as a result, charge you more upfront fees and higher interest rates. They may also approve you for a lower loan amount or credit limit.
With fair credit, you might also have difficulty getting approved for certain financial products. For example, you might need a higher credit score to get the best rewards cards or certain types of mortgages. Landlords and property managers may also have credit score requirements. You might have to pay a larger security deposit if you have a fair credit score.
Is a 620 Credit Score Fair?
Yes, 620 is within the 580-669 range for a fair FICO score and, thus, would be considered a fair credit score. A 620 is also in the VantageScore range for fair (580 to 669).
A credit score is a three-digit number designed to represent someone’s credit risk (the likelihood you’ll pay your bills on time). Lenders use your credit scores — along with the information in your credit reports — to help determine whether to approve you for a loan or credit line and, if so, at what rates and terms. Many landlords, utility companies, insurance companies, cell phone providers, and employers also look at credit scores.
Knowing your credit scores can help you understand your current credit position. It also provides a baseline from which you can implement change. With time and effort, you may be able to build your credit and gradually move your credit score into a higher category, possibly all the way up to exceptional.
It’s a good idea to periodically review your credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) to make sure all of the information is accurate, since errors can bring down your scores. You can get free weekly copies of your reports at AnnualCreditReport.com .
However, your credit reports will not contain your credit scores.
Fortunately, there are easy ways to get your credit scores, often for free. Many credit card companies, banks, and loan companies have started providing credit scores for their customers. It may be on your statement, or you can access it online by logging into your account.
You can also purchase credit scores directly from one of the three major credit bureaus or other provider, such as FICO. Some credit score services and credit scoring sites provide a free credit score to users. Others may provide credit scores to credit monitoring customers paying a monthly subscription fee.
Your credit scores are based on information in your credit reports, and different things can help or hurt your scores. FICO scores are based on the following five factors.
1. Payment History
This looks at whether you’ve made your debt payments on time every month and is the most important factor in computing your FICO credit score. Even one payment made 30 days late can significantly harm your score. An account sent to collections, a foreclosure, or a bankruptcy can have even more significant and lasting consequences.
2. Amounts Owed
This notes the total amount you’ve borrowed, including how much of your available credit you’re currently using (called your credit utilization rate). If you’re tapping a sizable percentage of your available credit on your credit cards (such as 30% or more), for example, that can have a negative impact on your score.
3. Length of Credit History
Experience with credit accounts generally makes people better at managing debt (research bears this out). As a result, lenders generally see borrowers with a longer credit history (i.e., older accounts) more favorably than those that are new to credit. All things being equal, the longer your credit history, the higher your credit score is likely to be.
4. Credit Mix
This looks at how many different types of debt you are managing, such as revolving debt (e.g., credit cards and credit lines) and installment debt (such as personal loans, auto loans, and mortgages). The ability to successfully manage multiple debts and different credit types tends to benefit your credit scores.
5. New Credit
Research shows that taking on new debt increases a person’s risk of falling behind on their old debts. As a result, credit scoring systems can lower your score a small amount after a hard credit inquiry (which occurs when you apply for a new loan or credit card). The decrease is small, typically less than five points per inquiry, and temporary — it generally only lasts a few months.
Steps That Can Help Improve Fair Credit
While you may still be able to qualify for loans with fair credit, building your credit can help you get better rates and terms. Here are some moves that may help.
• Pay your bills on time. Having a long track record of on-time payments on your credit card and loan balances can help build a positive payment history. Do your best to never miss a payment, since this can result in a negative mark on your credit reports.
• Pay down credit card balances. If you’re carrying a large balance on one or more credit cards, it can be helpful to pay down that balance. This will lower your credit utilization rate.
• Consider a secured credit card. If you’re new to credit or have a fair or low credit score, you may be able to build your credit by opening a secured credit card. These cards require you to pay a security deposit up front, which makes them easier to qualify for. Using a secured card responsibly can add positive payment information into your credit reports.
• Monitor your credit. It’s a good idea to closely examine the information in your three credit reports to make sure it’s all accurate. Any errors can drag down your score. If you see any inaccuracies, you’ll want to reach out to the lender reporting the information. You can also dispute errors on your credit report with the credit bureaus.
• Limit hard credit inquiries. Opening too many new credit accounts within a short period of time could hurt your scores because credit scoring formulas take recent credit inquiries into account. When shopping rates, be sure that a lender will only run a soft credit check (which won’t impact your scores).
Reasons to Improve Your Credit Score
Building your credit takes time and diligence, but can be well worth the effort, since our scores impact so many different parts of our lives.
Loans
Credit scores are used by lenders to gauge each consumer’s creditworthiness and determine whether to approve their applications for loans. A higher score makes you more likely to qualify for mortgages, auto loans, and different types of personal loans. It also helps you qualify for more favorable lending rates and terms.
Credit Cards
Credit card issuers typically reserve cards with lower annual percentage rates (APRs), more enticing rewards, and higher credit limits for applicants who have higher credit scores. A fair credit score may qualify you for a credit card with a high APR and little or no perks. Improving your credit score could potentially give you the boost you need to qualify for a better credit card.
Security Deposits
Just found your dream apartment? A fair credit score could mean a higher security deposit than if you had a good or better credit score. With a poor or fair credit score, you may also be asked to pay security deposits for cell phones or basic utilities like electricity.
Housing Options
A fair or poor credit score can even limit which housing options are available to you in the first place. Some landlords and property management companies require renters to clear a minimum credit bar to qualify.
It’s possible to get a personal loan with fair credit (or a FICO score between 580 and 669) but your choices will likely be limited.
Personal loan lenders use credit scores to gauge the risk of default, and a fair credit score often indicates you’ve had some issues with credit in the past. In many cases, borrowers with fair credit may be offered personal loans with higher rates, steeper fees, shorter repayment periods, and lower loan limits than those offered to borrowers with good to exceptional credit.
Although some lenders offer fair credit loans, you’ll likely need to do some searching to find a lender that will give you competitive rates and terms.
💡 Quick Tip: Generally, the larger the personal loan, the bigger the risk for the lender — and the higher the interest rate. So one way to lower your interest rate is to try downsizing your loan amount.
The Takeaway
Having a fair credit score is better than having a poor credit score and doesn’t necessarily mean you won’t qualify for any type of credit. However, the rates and terms you’ll be offered may not be as favorable as those someone with good or better scores can get. With time and effort, however, you can move up the credit scoring ladder. If you work on building your credit score until you have good or better credit, you’ll gain access to credit cards and loans with lower interest rates and more perks.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.
SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.
FAQ
Is fair credit good or bad?
A fair credit score is neither good nor bad, it’s just okay. FICO credit scores range from 300 to 850 and a fair score is 580 to 669. It’s better than a poor credit score but below the average credit score.
What’s considered a fair credit score?
According to the FICO scoring model, which ranges from 300 to 850, a fair credit score is one that falls between 580 and 669. It’s one step up from a poor credit rating but below good, very good, and exceptional.
Is a 620 credit score fair?
Yes, a 620 credit score is considered to be in the fair range. According to the FICO scoring model, which ranges from 300 to 850, a fair credit score is one that falls between 580 and 669.
Photo credit: iStock/Ivan Pantic
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Losing your job can be emotionally painful (weren’t you doing a good enough job?) and can throw your finances for a major curveball. How will you pay your bills? How long will this situation last?
Take a deep breath, and arm yourself with knowledge for financially surviving a layoff. Whether you’re going through this situation right now or are worried it might occur, you can likely make adjustments and you can make and tap resources to weather this challenge. It’s a phase to move through but not to define you. Read on to learn:
• How to budget when laid off
• How to file for unemployment benefits
• How to prioritize debt
• How to bring in income.
Preparing Financially for a Layoff
Unfortunately, layoffs seem to be a part of modern life. In the first nine months of 2023, there were more than 605,000 layoffs, which marked a 198% increase versus the year prior. That’s not heartening, but it’s a way of saying that if you are laid off, you are not alone, and it can also be wise to prepare financially for a layoff if you are currently employed.
Not having a steady income probably means you’ll have to figure out how to pay your bills when laid off. Until you find another stream of income, it’s important to keep your budget in order and learn to live within your means. Being financially prepared means having a clear understanding of what your expenses are so you can stay on track, especially with debt, if you have it. There are also resources you can access that may help with your cash flow during this difficult time.
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Steps to Take to Prepare for a Layoff
Here are some smart moves that can help you be prepared and not panic if you do get laid off.
Start an Emergency Fund
A common strategy is to build up an emergency fund prior to an event like job loss. It’s a way of preparing for a layoff before it happens. An emergency or rainy day fund is typically a savings account that you’ve been adding to on a weekly or monthly basis. Having roughly three to six months’ (or more) worth of monthly expenses is helpful. That sum can tide you over at a moment of job loss and give you peace of mind.
• You may want to automate your savings and have a small amount ($25 can get the ball rolling) transferred from checking to savings every payday. Or have that amount direct-deposited into savings.
• The emergency fund should only be accessed for emergencies, as its name suggests. (No fair dipping into this kind of savings account when there’s an amazing sale at your favorite store.)
• If you have the opportunity to contribute more than usual (say, you receive a financial windfall, like a bonus or a tax refund), do boost your emergency savings because you never know when you will need to tap into that account.
Budget, Budget, Budget
If you have an inkling that your company is preparing to lay off some employees or if you lose your job, it’s wise to double-check your weekly budget. This means separating your necessary spending from your discretionary spending.
• Necessary expenses include things like rent or a mortgage, utilities, food, and health insurance. Don’t forget about minimum debt payments, such as student loan and credit card payments.
• Discretionary spending may include traveling, dining out, new clothes, and entertainment.
It can be helpful to focus on how much you need to spend each month for necessary expenses (some people refer to this as their monthly “nut.”) Make a list of these basic living expenses and see what they total. Then, pre-layoff, you’ll also see how much you can allocate for activities that you want to do. It’s probably not the best idea to spend every penny each month. You want to have extra money at the end of the month to put toward savings.
If and when a layoff hits, you’ll focus on necessities and minimize your discretionary spending (more details below). You can also tweak your budget when unemployed to, say, cut back on some long-term savings to get you through this moment.
File Unemployment Benefits
If you do lose your job, you may be able to qualify for unemployment benefits. This can get some funds flowing your way to help tide you over.
• Read the eligibility requirements to see if your situation aligns with the rules for unemployment. The eligibility requirements are likely to vary from state to state and may be determined on a case by case basis; payment amounts will vary as well.
• If you qualify, filing for unemployment benefits will allow you to receive payments if you are out of a job due to no fault of your own. (There is a possibility that those who are fired because they don’t meet job qualifications may receive funds as well.)
• Generally, to qualify for unemployment benefits, you should be able and available for work, as well as be looking for employment. Once you’ve determined your eligibility, you can file on your state’s official government office of unemployment compensation website. The site should give you guidance on when to expect benefits.
Ask About Severance Packages
Severance pay can be provided for employees after they are no longer employed at a company. Severance is based on the duration of employment, but your employer is not required to provide severance upon termination.
If you were terminated through no fault of your own, employers may pay, for example, two weeks of salary for each year of employment. Severance may also include health insurance benefits and even services to help you find a new job. These can be very helpful supports when you’ve lost your job.
Use Credit Cards Only for Emergencies
If you become unemployed, it’s wise to stop using credit cards to make purchases. Paying with your credit card creates debt that comes with high interest rates (currently more than 20%). At such high interest rates, debt can really snowball.
Also, when you are out of work, it can be challenging to pay an existing credit card balance. If you manage to pay the minimum balances of your credit card debt rather than paying in full every month, the credit card debt may cost you more over time since you also have to factor in added interest.
If you find yourself in this kind of a bind with credit card debt, take action. Consider a balance transfer credit card that offers no or very low interest rates for a period of time. Or speak with a debt counselor at a nonprofit organization like the National Foundation for Credit Counseling (NFCC).
Make Sure Emergency Funds Are in Order
Emergency funds, as mentioned above, are an important part of a financial plan and can be a lifesaver for someone who is unemployed. If you are in a situation where you unexpectedly don’t have a stream of income until you find another job, you’ll be more at ease if you have built up an emergency fund over time, as mentioned above.
In this case, you can dip into your emergency fund for mandatory expenses to fulfill your short-term needs. If you don’t have emergency funds, unemployment benefits become that much more important. Borrowing from a close friend or a family member might also be an option.
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Practical Tips for Saving Money After a Job Loss
Saving money after a layoff can certainly be difficult. You don’t have the usual cash infusion to pay your bills and buy groceries. That is why you need to proceed with caution and learn how to economize when you lose your job. Here are strategies for making ends meet during this difficult time.
Get Back on LinkedIn and Start Networking
If you’re job-hunting, Linkedin can be a great tool for networking. The platform is set up so you can find and interact with former colleagues, alumni from your college, and professionals at companies you aspire to work for.
• Start commenting on people’s Linkedin posts and have conversations with existing connections.
• Build up your profile so recruiters know your job history, your professional skills, and that you are looking for work. This can lead to job opportunities.
Prioritize and Negotiate Any Debts if Needed
Continuing to pay down debt while unemployed should still be a priority. One strategy to pursue is paying off debt that has the highest interest rate. Debt with higher interest rates cost more, so paying this off first will have you saving money in the long-term.
But “How can I pay down debt if I don’t have income?” you are probably wondering. One answer: Try to negotiate your debt. It can be possible to work with your credit card company to negotiate interest rates, payment amounts, and the terms on your credit card debt.
Avoid Luxuries Temporarily
Being unemployed can be a frightening experience. You no longer have a steady flow of income and may not feel financially prepared to weather short-term expenses. To ease this burden, work to eliminate spending on luxuries. Now might be a good moment to downsize streaming services and other subscriptions.
Also eyeball what expenses you have on the horizon: If you had booked a vacation house or a cruise for a few months down the line, it may make good financial sense to investigate getting a refund. That money could be allocated toward your everyday expenses as you job-hunt.
Look at Investments and Retirement
If you are temporarily out of a job, do your best to keep your hands off your retirement funds. You worked hard to save that money, and it’s there to fund a long-term financial goal. That said, some people do tap their retirement accounts as a last resort when unemployed.
When you withdraw from your retirement account before the age of 59 ½, you will incur a penalty tax. However, there are some cases where you may be able to withdraw funds when unemployed without paying this.
You may be able to set up what’s known as a substantially equal periodic payments (SEPP) over five years or until you hit age 59 ½, whichever is greater. However, if you do receive this kind of distribution, it will likely count as income and may therefore lower any unemployment benefits you may be receiving. Talk with your plan administrator to learn more.
Start a Side Hustle
You might consider starting a side hustle to bring in some extra cash while looking for full-time work. There are many ways to earn more money. You could rent out an extra bedroom in your home or apartment, sell unwanted items, drive for Uber or Lyft, or market your professional skills on online service platforms such as Fiverr or Upwork. These are viable avenues to get some money coming in until you lock down a new job.
The Takeaway
Figuring out how to manage your finances when you are in between jobs can be stressful, but there are ways to prepare and then actions that can help you get by. Building and then tapping an emergency fund, accessing unemployment, and budgeting are some actions to take.
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FAQ
How do you manage the emotional impact of getting laid off?
Getting laid off or fired from your job is a tough challenge. You may feel angry and ashamed. Acknowledge those feelings, and remind yourself that millions of others have navigated this situation. You are not alone. Also, taking action can foster feelings of control and personal agency. Updating your resume, networking, reworking your budget, and engaging in self care rituals (like exercise) may also be positive steps.
How do you recover after being laid off?
Recognize the shock and upsetting feelings that you are likely experiencing. Then, take steps to improve your situation: Seek unemployment benefits, apply for jobs, start a side hustle, cut some expenses, and perhaps volunteer to build new skills and fill free time. These moves can help you move forward from your job loss.
Is it better to be fired or laid off?
In both scenarios, you don’t have a job, but if you are fired, it is typically due to a performance issue. With a layoff, you will likely be able to file for unemployment and you may receive severance pay from your employer. When you are fired, you may or may not be able to receive unemployment funds and you will probably not be eligible for severance.
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When you’re married and are each other’s beneficiaries, it makes sense to create a single joint will, right? Not necessarily. Even if you plan to leave everything to your significant other upon death, creating this kind of legal document may lead to complications down the line.
Let’s take a closer look at the different kinds of wills married couples can create so you can decide what’s best for you. Here’s what you need to know so you can have the right legal paperwork in place.
What Is a Joint Will?
A joint will is a single shared legal document, signed by two or more people. It is relatively uncommon today, and many attorneys recommend against them. One of the motivations for a joint will is that, when one person dies, it’s nearly impossible for a surviving spouse to change the terms of the will. This can be problematic because circumstances change over time. What if the person mentioned to inherit property in the will has passed away?
That said, a joint will for a couple can seem desirable precisely because it’s not flexible. This can ensure that a child from a previous marriage, for example, inherits what is outlined in the will even if their parent dies before their new spouse does. But these sort of permanent clauses can be handled in a trust, which can allow for complex, shifting situations.
💡 Quick Tip: A trust is a customized estate planning tool that can be helpful for your heirs in addition to a will.
How Do Joint Wills Work?
A joint will for a married couple is a single document, signed by two partners. When you’re both alive, changes can be made as long as you both agree. But once a partner dies, the will becomes binding.
For this reason, a joint will for a married couple can be binding, restrictive, and not necessarily optimal for the complexity of modern-day life.
Say that the will stipulates that the house the couple owns will be inherited by their three children upon the death of both spouses. But what if the surviving spouse has a financial emergency and wants to sell the house? Or simply wants to downsize to a smaller living space? Because of the will, they could be stuck in a difficult scenario.
Also consider that a joint will doesn’t always cover the ‘what ifs’ that can come up during life. From remarriage to family disputes to having more children, a joint will can lock assets in time, making it tough for the surviving spouse to move on.
How Do Mutual Wills Work?
Fortunately, there are options for those who worry about a joint will being too rigid. A more common option that offers flexibility is what’s known as a mutual will, or mirror will. In this case, two documents are created, one for each spouse. They may be identical, but because they are two documents, separately signed, the surviving spouse can then modify their own individual will when their partner passes away.
But what if you are concerned that you might die first and your surviving spouse could, say, omit a child or other loved one from their inheritance? (Yes, that may sound odd, but life contains many complicated family situations!) In this case, lawyers may recommend a trust as an option to ensure that your own personal wishes are carried out when it comes to your property. The trust can also make sure that your directives are followed when it comes to joint property mutually owned, like real estate.
So, what are the pros and cons of joint wills versus individual (separate) wills? In general, the biggest con against a joint will may be the lack of flexibility. But for some people with relatively simple estates, this can seem like a positive.
Pros of a joint will:
• Simplicity. It’s a one-and-done proposition!
• Clarity. It ensures that both partner’s wishes, as written, will be respected, even after death.
Cons of a joint will:
• Rigidity. If a partner gets remarried or has more children, it will be complicated if not impossible to change the original will.
Pros of an individual will:
• Flexibility. After a partner dies, the surviving partner can change the will to reflect their new reality.
• Simplicity. You can create one document and each sign it separately. Each individual is then free to amend their own will.
Cons of an individual will:
• Flexibility. Yes, this is a double-edged sword. These wills aren’t “carved in stone” which can be a good or bad thing. Here’s the latter: With individual wills, the wishes of the partner who dies first may not be fully honored. These concerns may be solved by the creation of a trust.
• Maintenance-intensive. A surviving partner may want to rewrite their will over time as their life circumstances change.
Do Husbands and Wives Need Individual Wills?
In most cases, yes, it’s beneficial if husbands and wives have separate wills. The wills can be identical — also called a mutual will or mirror will — but having two distinct documents that are individually signed can help protect against what-ifs in the future. Having individual wills can give flexibility to the surviving spouse.
Let’s say that a joint will stipulates that a house owned jointly by a married couple will go to children upon the death of both spouses. That means if one spouse dies, the other spouse may not be able to sell the house that he or she lives in, even in the case of financial hardship. A joint will can lock a surviving spouse in time, despite evolving circumstances.
Instead, a couple may prefer individual wills. These can mirror each other, but the surviving spouse retains flexibility in case their needs or circumstances change after the spouse dies.
Worth noting: For some, the lack of flexibility of a joint will may be seen as positive. For example, some couples may want a joint will to ensure their children receive an inheritance, even if the surviving spouse remarries. However, some legal experts believe this goal can better be achieved through the creation of a trust.
As you think about making your will, it can be helpful to consider the pros and cons of a joint will. Getting an expert opinion can also be a smart move.
What Happens to a Joint Will When Someone Dies?
A joint will is essentially frozen in time when someone dies. The will becomes “irrevocable,” and property must be divided according to the terms of the will. If it says all assets are to be inherited by the surviving spouse, then the surviving spouse will inherit assets. But confusion may occur if and when both spouses pass away. A joint will then makes it hard, if not impossible, to reallocate property.
Let’s consider another scenario to see why a joint will can be problematic. Perhaps a joint will specifies that a certain sum of money is to go to a charity upon death. If the charity no longer exists after one spouse passes away, this may lead to complications and a legal headache.
In short: A joint will is similar to a time capsule. While its contents may make sense now, it can be helpful to consider “what ifs” that may happen ten, twenty, or fifty years in the future. This can lead some couples to decide that individual wills will work better.
It is possible to make a joint will online. But because not every state recognizes a joint will, it’s important to make sure you live in a state that does before you move forward.
💡 Quick Tip: It’s recommended that you update your will every 3-5 years, and after any major life event. With online estate planning, changes can be made in just a few minutes — no attorney required.
The Takeaway
End-of-life planning is an important way to express your wishes and protect those closest to you. A will is one key component of that, but married couples have an important choice to make when deciding whether to have joint or individual wills. Even if you and your spouse are the ultimate joined-at-the-hip lovebirds, having separate wills may be a good idea. It can often provide more flexibility and family peace in the years ahead.
When you want to make things easier on your loved ones in the future, SoFi can help. We partnered with Trust & Will, the leading online estate planning platform, to give our members 15% off their trust, will, or guardianship. The forms are fast, secure, and easy to use.
Create a complete and customized estate plan in as little as 15 minutes.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
