If I Might Lose My Job Should I Pay off Debt or Save the Money?

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In general, it's better to pay off debt rather than save your money, assuming you have a sufficient emergency fund in place. But if you think you might lose your job, this is one time when you should save before paying off your debt.

If you know your job is at risk, you should aim to save at least six months of living expenses, including your rent or mortgage, bills, debt payments, health insurance, and any living expenses. Focus on building your emergency fund, while also zeroing in on your job search. During this time it is also important to set up a bare-bones budget and get used to living on it.

What Are My Options?

With some jobs, you may qualify for unemployment or a severance package, especially if you were let go through no fault of your own. However, if you were a contract employee, your contract may simply not be renewed, and you won't qualify for unemployment. Be sure to do your research and know what you are entitled to if you think you are going to lose your job.

If you are a contractor, it's important to think ahead and have a financial plan in place if your contact is now renewed. It's also smart to start looking for a new job several months before your contract runs out.

What If I'm the Sole Breadwinner?

If you are single or the sole breadwinner in your family, you need to have a solid plan in place to help you get through any potential periods of unemployment. This is also a good idea if you are a contract worker or you work a job that pays you commission.

Each month, set aside money into your emergency fund. If you feel that your job may be in jeopardy, it's OK to pare down what you pay in debt (while still making minimum payments) and stop any investments you make to further pad your emergency fund.

Planning ahead now and saving money in a fund for those times can help take away some of the stress. As mentioned, if you feel that you may lose your job, begin your job search before you lose your job. That way, you won't be desperate and take any job you are offered. Keep in mind that you may have to relocate for a new job, so you should save for that potential expense, as well.

Other Considerations

You should also think about how you are going to continue to pay for health insurance if you become unemployed. This is especially important if you are your family's primary breadwinner or if you have children. However, if your spouse works, you should look into getting health insurance through their employer if you think you might lose your job.

If that's not the case, COBRA is an option, but it is often very expensive. You may want to look into independent health insurance to keep yourself covered.

If you are out of work for another reason, such as the birth of a child or an illness, you can prepare for that situation in the same way. In the time leading up to your scheduled time off, set aside extra money to cover your lost income. You also may be able to apply for disability pay, which will at least provide you with a percentage of your actual pay.

Don't Forget to Budget

When you set up a bare-bones budget, it means that you cut all unnecessary spending. This can mean cable television or streaming services, eating out, new clothing, even entertainment costs. Strip back as much spending as you can and put it into savings.

Remember, this only temporary, but it can make a big difference in how long you can survive while unemployed. You also may consider cutting back on other things, such as internet service or moving to a cheaper cell phone plan. You should also look at your grocery budget to see if you can cut money in this area by changing the types of food that you buy.

Once you find a new job, you will need to rebuild your emergency fund. After that, you can refocus on your debt repayment plan and any investing goals. Although you can relax your budget a little bit when you have steady work again, it’s a great time to stay focused and bounce back financially. Consider keeping some of the changes you incorporated so you can reach your other financial goals more quickly and more quickly rebuild your emergency fund.

If you think you may lose your job, it can be discouraging. But it's important to keep a positive attitude as you plan for this financially and continue to look for work.

And don't forget: If you need help, you can ask for it. A temporary solution may involve moving back in with your parents while you look for work, or moving to a cheaper house or apartment. Be sure that you are open to all options so that you don't go into debt and can come out of this situation with your finances intact.

Updated by Rachel Morgan Cautero.