Although unemployment may be falling (currently 5.5%) and over 295,000 new jobs were added in the month of February, the effects of unemployment are lingering and long-term – but you may have more control over those effects than you think.
According the Pew Research, on average it only takes a currently unemployed person about 13 weeks to find work again which is a monumental improvement from the 25 weeks (half a year) it would have taken for an unemployed person to find work again, back in 2010.
Let’s be honest though, living without an income for 13 weeks is still no walk in the park. What is even more startling is that 1-20 years after a period of unemployment, workers earn about 15 percent lower than those who never experienced unemployment, according to research. Meaning, the effects of unemployment can go far beyond the three months it may take to find a new income.
There are many reasons for this decline in pay, but the biggest reason workers experience a decline in earnings is because, “reservation wages (the lowest wage at which a job would be accepted)…decline over time, as workers’ expectations degrade and their needs increase,” the Urban Institute study found. Essentially, desperation for income increases and leads to lower-paying jobs – and that is just the financial effect of unemployment. The National Journal cites a study by Gallup that found unemployed workers experience significant mental-health issues including moderate to severe depression as well.
The Bottom Line
Studies like these validate the need for an emergency savings account. At times of plenty it can be ironically hard to set aside money for a rainy day. However, the studies suggest that an emergency account will help you not only meet your temporary needs in times of scarcity, but will ease the desperation of unemployment ensuring a quality and deserved re-entry to the workforce as well. A savings fund will have a long lasting effect on the quality of life and work after unemployment.
At Mvelopes, the personal-finance experts recommend working towards an emergency savings account to pay for the cost of living for 90 days. That amount may seem daunting with your current financial situation, but rest assured it is possible. If a 90 day emergency fund seems to far off, begin by building a $1,000 savings fund and progress from there.
Setting a goal, like a 90-day emergency fund, will give your family an identifiable target that is far more likely to be hit. These days, unemployment is a game of Russian-roulette and pretending that, “It will never happen to me,” can be a dangerous gamble.
Instead, bet on yourself and begin contributing, or rededicate yourself to contributing, even small amounts, to your emergency savings fund – your future self will thank you.