Why I Socked Away Over $500,000 in a ‘Layoff Fund’

Through these two excruciating years of belt-tightening, we learned a lot about what is truly valuable to us and, perhaps more important, what we can happily do without. While Broadway tickets to Wicked might be fun at $200 a pop, hearing the New York Philharmonic on a picnic blanket in Prospect Park is also phenomenal — and free. While we still hope to one day take a family trip to Rome, knowing that we’re on solid financial footing comes first. And even after Jason and I clawed our way back into full-time jobs, those lessons stuck with us since we knew, in our bones, that one (or both) of our jobs could easily go belly-up again.

That’s when the idea of a layoff fund clicked into place. Even though we were back to two incomes — and as tempting as it was to let loose and live a little — we made a pact to clamp down on “lifestyle creep,” sticking to the same thrifty practices we’d perfected while unemployed. We packed lunches for the office. Since Jason needed a car to get to work, he paid $1,400 for a clunker that miraculously never broke down during his hour-long commute each way. And, while we took pains to make sure our daughter didn’t feel deprived, setting money aside for extracurriculars like rock climbing and summer camp, she developed a habit of asking, “But Mommy, how much does that cost?” even though we assured her that she shouldn’t worry.

Meanwhile, Jason and I funneled over half of every paycheck into the layoff fund — an online high-yield savings account we’d selected since it had an annual percentage yield (APY) hovering over 4 percent, the highest we could find at the time. Over nine years, with compound interest, that fund grew to more than $500,000. And since our expenses had been whittled down to under $80,000 per year, this meant that even if we were both laid off, that half million could cover our bills for over six years before running out, meaning we wouldn’t have to take on debt or dip into our retirement savings to make ends meet while in between jobs. 

Once Jason saw the results, he stopped complaining to his pals about how cheap his wife was and began bragging about all the money we’d socked away.

How to build a layoff fund (and its benefits)

While many financial experts recommend that workers of all ages have three to six months’ worth of expenses stashed in an emergency fund, our decision to supersize our safety net with a hefty layoff fund made sense given our job insecurity — and it could make sense for other older workers as well.

“In today’s volatile economy, having a layoff fund is crucial for individuals over 50,” says Jake Falcon, founder and CEO of Falcon Wealth Advisors in Kansas City. “This age group often faces higher risks of layoffs due to age discrimination and the increasing trend of companies restructuring to lower costs. A layoff fund provides a financial cushion that can reduce stress and allow individuals to focus on finding the right job rather than the first available one.”

The first step to building a layoff fund is to take an inventory of your monthly expenses so you can not only assess what could stand for a trim but also so you know how much to put away to tide you over for a certain period of unemployment. While the amount Falcon recommends varies by circumstances, he suggests six months at a minimum, presuming you have no non-retirement investments you can pull from in a pinch. “It would also depend on the individual’s industry,” he says. “If they are in a high-demand job function and can get a new job relatively easily, then they may not require as much cash on hand. If their industry is very niche, or if they want to change industries altogether, then it might require more liquidity to bridge the gap.”

As for where to stash a layoff fund, “high-yield savings accounts or money--market accounts are ideal places, as they offer liquidity and some interest earnings while keeping your money safe,” Falcon says.

Still, many financial experts say that workers should first prioritize filling their retirement plan, like a 401(k), to reap the tax benefits and any “free money” that may come from a company match. But following that up with a layoff fund can help protect your retirement savings, since you won’t be tempted to tap into retirement accounts earlier than planned, which can carry stiff penalties.

“I had a client who built up a fund slowly over three years,” recalls Chris Heerlein, CEO of REAP Financial, a retirement planning firm in Austin. “When they were laid off at 52, they had enough saved to cover eight months of living expenses and avoided touching their retirement savings altogether. That breathing room made a huge difference in their decision-making.”

Layoff funds can also provide a bridge for people considering a new career path, which may require additional education or training. 

“I had a layoff fund that helped me with a career transition from IT to personal finance a little over two years ago,” says Chad Gammon, a certified financial planner at Custom Fit Financial in Cedar Rapids, Iowa. “This helped with a gap year where my income was a lot lower. It gave me the confidence to make the career change.”

As for my own next steps, I’m still figuring that out. While I am ideally hoping to find a full-time job, I don’t want — and thankfully don’t need — to take any job just for the steady paycheck. And even if I never earn as much as I did in my last position, I am fine with that, too. My main priority is to write about topics I care about. This article feels like a good start.