A Layoff Story: The Ant, the Grasshopper, the Honeybee & COBRA

One of my favorite fables attributed to Aesop is The Ant and the Grasshopper.   I mean, really; what’s not to love?

You know the story; the grasshopper spends all summer long partying it up like a rock star while the ant prepares for the coming winter by building a shelter and storing food for the winter.   Of course, winter eventually arrives and the industrious ant finds himself well-fed and toasty-warm while the improvident grasshopper simply ends up as, well, toast.   The fable offers a terrific lesson for kids — and adults — on the importance of saving and hard work.

Why I’m Constantly Saving for Winter

Now, as an engineer, I occasionally have to endure business cycles where my employer has to layoff employees.   It’s the nature of the industry and one that I have always taken very seriously, especially since I am the sole breadwinner for my family.

If I were laid off tomorrow I would be entitled to roughly three months of severance pay, after which I would be eligible to receive unemployment benefits of roughly $2000 per month (before taxes) — which on the surface would seem to pose a tremendous problem because our household expenses are currently, on average, more than $8100 per month.

Don’t Panic — This Is Only A Test

With that in mind, this week I decided to undergo a little layoff drill to try and ascertain exactly how much we’d have to cut back to make ends meet on unemployment benefits alone.

Luckily, the Honeybee and I have been meticulously tracking our monthly expenses since 1999, so we have an excellent handle on exactly where all our income is going.

Anyway, I asked the Honeybee to propose what cuts she would make to our household budget in the event that I was laid off.

For reasons which I will explain later, I purposely failed to give her a target figure to aim for.   Meanwhile, I independently made my proposed cuts.

The results are shown in the figure below.   As you can see, the Honeybee and I disagree somewhat — at least initially — on the scope and magnitude of the cost cutting.   The Honeybee knocked down our budget by almost half, while I was a bit more draconian, slicing our spending plan by two-thirds.

Although we disagreed with our first pass on the size of the cuts, neither of us were able or willing to pare the budget to a degree that was sufficient to cover the paltry $2000 per month that I would be eligible to receive in unemployment benefits.

COBRA: Two Steps Forward One Step Back

For many people, one of the biggest impacts of getting laid off is the loss of employer-provided health benefits.   The Consolidated Omnibus Budget Reconciliation Act (COBRA), passed way back in 1986, gives laid off employees the option of extending their employer’s health care benefits for a minimum of 18 months.

While that is good news, there’s a catch — COBRA can be extremely expensive.   You not only have to pay the insurance premium that you paid before you were laid off, but you also have to come up with the amount your former employer was paying for you too, plus an administrative fee of up to 2 percent.

In my case, that means I’d need to come up with roughly $750 per month to maintain my benefits.

Back to the Ant and the Grasshopper

On the surface, it might seem like our family will be in a very tough predicament if I end up losing my job.

Fortunately, I’ve never forgotten the fable of The Ant and the Grasshopper.   As such, even though I am very well-paid, I have always striven to live well below my means and save up for that dreaded “winter” when I may finally lose my job.

Right now I have over $50,000 in cash reserves.   In the event I am laid off, those reserves will provide a lot of financial flexibility that our household wouldn’t have otherwise.     (Which is why, for this drill, I was not interested in ever giving the Honeybee a cost bogey to shoot for.)

For the sake of argument, let’s assume the Honeybee and I agree to split the difference on our budget cuts — say, $3500 per month.   Add another $750 per month for COBRA and that brings our total monthly expenses to $4250.   So in order to pay all the bills we would need to draw down our savings by $2250, after drawing unemployment benefits of $2000 per month.     At that rate, our emergency savings would last quite a long time, regardless of how long I was able to draw unemployment benefits — and those reserves would last even longer if the Honeybee took a temporary job.

The Moral of the Story

Don’t be a grasshopper and fool yourself into believing unemployment benefits will be sufficient to sustain you if you lose your job; for most households they won’t be.

I can’t imagine the upheaval that our family would face if I was laid off and we didn’t have a healthy emergency fund.   By having one, though, we’ll be able to avoid — or at least postpone for a relatively long time — some extremely tough decisions that would have to be made if we were forced to rely on unemployment benefits alone.

I think every household should go through a layoff drill like this. It not only helps hone a plan of attack prior to facing a severe financial challenge like a layoff, but it is also a great indicator of how well you’re prepared should such a disaster strike right now.

Photo Credit: mickeymox



Comments

  1. 1

    olivia says

    As usual, thought provoking. In our situation my sweetie is also the sole bread winner, but our housing is part of the package. So if he lost his job we’d be scrambling for living quarters. Not a pleasant thought. Which would involve moving expenses and all those nice little upfront deposits on utilities, rent, and such, too.

  2. 2

    Holly says

    Yes, we would be in a lot of %#!_+ if DH were to lose his job. He’s a public employee and has already had all overtime cut (due to county budget woes) which amounts to anywhere from $750 to $900/mo. before taxes. Also would be hard-pressed to find the funds for private health insurance.

    I took a part-time job to help bridge the gap but it pays so little and the commute is 30 min. ea. way that it seems to not make much difference overall.

  3. 3

    Darla says

    I recently drove my satellite bill down from $110 to $17 by cutting it and making a one-time purchase of a Roku device & a antenna converter box. Roku streams internet to my TV in HD, With a $7.99/mo fee to Hulu Plus — and $8.99/mo to Netflix, I can see virtually (no pun intended) everything and am saving $93 a month. Don’t get me wrong, I loved satellite with DVR… but not $1320 a year kind of love. Simple changes add up to amazing savings.

  4. 4

    says

    Looks like Honeybee cut out your haircuts when you become unemployed… :)

    I was actually just thinking about this very thing the other day. My husband was sole provider for years, but I work part time now as a computer programmer (entirely from home, no commute for me!).

    Even with my part time employment and unemployment, we would be in trouble.

    Cobra is ridiculously expensive. When my husband changed jobs willingly a couple years ago, Cobra was going to cost 1200/month. Since his employer didn’t provide benefits for the first 2 months, I just bought a short term catastrophic policy through Assurant for 386 bucks (total for both months) and hoped for the best. It all worked out fine, but I feel bad for those with chronic conditions that can’t make such choices.

    Great post.

  5. 5

    Spedie says

    I was laid off twice in the last couple of years – as the sole breadwinner (single parent). The first was 12/2008 and the second was 1/2010 – a mere 13 months apart.

    I live a month ahead on my bills (what I get paid in January goes to ALL of February bills, for example). That gave me time to react.

    I also have my monthly budget divided – the first part comprises absolute necessities. The second part is optional stuff like investing, etc. When I got laid off, the second part went to zero on the budget. I was also able to cut things like commuting costs, as I wasn’t driving very much any more. I used about a tank of gas a month in my Corolla after both layoffs.

    My state gives about $1200 per month in unemployment benefits, which I applied for and received. This is the maximum in my state and I received the maximum.

    I had several “hold” accounts from my optional category of my budget, which served as an additional cushion before I had to start using my emergency funds.

    At the time of both my layoffs, I had 6 months of necessities in my budget in savings – about $28K. I was and still am, debt free, except the house.

    I was not able to afford COBRA – and went without health insurance during both layoffs. I didn’t die from it. I went to the doctor once – but negotiated the cost of the visit, to be paid in cash, upfront, prior to the visit. It worked well.

    I was ruthless with my expenses. My current income is about $106K per year. When I am in “emergency mode”, my monthly expenses are $3900 per month….of which $2207 per month is just my STUPID house payment!

    I advise everyone to go through the exercise Len suggests. I prepared, just in case. I was born a Grasshopper. When it came time to exercise what I had planned it was painful, but it was manageable.

    In my case, I didn’t have to use one cent of my emergency funds, in both layoffs, but it sure was scary.

  6. 7

    says

    We never really made this exercise, but I think it is a very good one. We both contribute to the household revenue, but one has a higher income. Without that income, we would be in trouble. We do have some emergency money, but not as much as we would like to, mainly because we are still quite young. Did you accumulate this money each month, each year, each pay check?

  7. 8

    says

    I am the sole breadwinner and I was unemployed for six months during the dotcom crash. Having money put away and low bills is a blessing. There is nothing worse than stressing over money and it’s so easy to avoid.

  8. 9

    Anthony says

    At least the Jack is not on that list. :)

    Seriously though…Great article and very important for everyone.

  9. 10

    says

    We did this a little less than a year ago (I posted it as What Would We Do If We Lose a Job?) and we got our expenses down from $3600-$4000 a month to less than $2600 a month without being in too much pain or $2000 a month but missing a bunch. We are both employed, so we live off of my husband’s salary and save my own…we are ants. :-)

  10. 11

    says

    Great exercise Len. It tells you a lot about your marriage when your cuts were so similar.

    Sure she wanted to keep a manicure occasionally, or was she wanting you to keep yours…

    But for the most part you attacked the same things, you, as most of us men are, were just more violent!

    This is sorta like on of our drills in medicine. If you have practiced it, you won’t panic when it happens for real!

    Preparation is key!

  11. 12

    says

    Preparation is 99% of the solution. This is good whether preparing for a job loss, or any other major change in income. Perhaps it is a good exercise to make changes so you can meet your retirement or savings goals. We all can benefit from this exercise!

  12. 13

    says

    $750 for COBRA…consider yourself lucky Len! My wife stopped working to take care of our baby and our COBRA bill is staggering (maybe because she had a really good plan). In fact, I think finding independent insurance for her and the baby would actually be cheaper, so I probably need to shop around.

    Ok, ok, stop nagging, I’ll start shopping around now :). I’ve been putting it off for too long anyway.

  13. 14

    says

    It’s always good to prepare for the worst. Dealing with problems is always easier if you’ve figured out a plan of action beforehand.

    I don’t care for the grasshopper/ant story. Why does the grasshopper get the bad rap? Plus, the ant did end up feeding him at the end of the story, so who’s really screwed? :)

  14. 15

    Brad says

    Len, I just want to say that I admire how open you are when it comes to sharing your finances. That takes a lot of guts especially because (I assume) you are using your real name. It really helps give me a good reference point for where my household finances are. Thanks again.

  15. 16

    says

    Len,
    Great exercise…one everyone should do. I am impressed that you and Honeybee are so close to being on the same page, especially considering that you didn’t give her a benchmark to shoot for. In my case, I am fortunate enough to be drawing a lifetime pension which is more than adequate for our monthly expenses of $3600. Our concern? Hyperinflation. How do I run a scenario check for that?

  16. 17

    says

    @olivia: Wow, housing is a terrific perk! If COBRA is tough to cover, there is no hope of unemployment bennies covering that.
    @Holly: One big benefit of being married yet having a sole breadwinner is that it, ironically, ends up acting as a safety net when a layoff happens because the spouse can at least help limit the financial bleeding by getting a temporary job.
    @Darla: Thanks for the tip — I’ll need to check that one out!
    @Everyday: Good point. If you can’t afford COBRA, I think catastrophic insurance is probably the next best thing.
    @Spedie: You’ve really got your act together Spedie! Thanks for sharing your experiences and lessons learned. You’re proof positive that we can all survive a layoff as long as we’re prepared!
    @DoNotWait: Our emergency fund money was accrued on a steady, but gradual basis, over a period of many years. Whenever I got a bonus, or cashed out some stock options, we usually put the money in the emergency fund as an added boost.
    @Bret: You’re so right. I’m all for reducing stress — and a healthy emergency fund allows folks to sleep well whether they are unemployed or employed!
    @Anthony: The Honeybee says the Jack Daniels is non-negotiable and untouchable! I’m not going to argue with her either. LOL
    @BIFS: Three cheers for the ants!
    @Dr. Dean: Hey, now… Those definitely are HER manicures and pedicures! Another big benefit of the healthy emergency fund is I don’t have to battle over them if I get laid off. Well, at least for a little while.
    @Krantcents: It really is an eye-opening drill, isn’t it?
    @Coach: Actually, I have one of those so-called “cadillac” plans that is now slowly being dismantled by my company due to penalties they will be otherwise forced to pay due to the new health car law. It is a major perk that is relatively inexpensive to me because my company is in a position to negotiate terrific rates and my particular plan is considered the company’s “preferred” plan.
    @Uproar: LOL! That’s funny! In my version, the lazy grasshopper knocks on the ant’s door and asks for a place to stay and three squares for the rest of the winter. The ant tells the grasshoppa that his house is not big enough for the two of them, gives him a box lunch and sends him on his way. The grasshopper then blames the ant for his own problems and dies.
    @Brad: That’s very kind of you to say! (Yes, that is my real name.)
    @Joe: Aww, thank you! I think the Honeybee and I are basically on the same page because we have split the financial duties evenly since we’ve been married — I do the long-term strategic planning and she handles the day-to-day operations and tracking. As for hyperinflation — I hear you! Hyperinflation rewards debtors at the expense of us responsible savers! I know it will wipe out all the sacrificing and saving we have made to build *our* retirement nest egg over the past two decades. I think our best hope is to keep the pressure on and insist that the size of our government — and it’s debt and obligations — be greatly reduced. Otherwise, the appearance of hyperinflation is just a matter of time.

  17. 18

    Carly says

    It’s great that you’re hoping for the best and preparing for the worst. And terribly brave of you to list your Expenses for us like that. But, Good Grief, you SPEND A LOT OF MONEY!! You spend the equivalent of my house payment on Entertainment, and then again on Misc Household Expenses. And there’s still $679 un-named, just “Other”. CAN I COME LIVE WITH YOU ;c)

    • 19

      says

      Sure, come on over. ;-) LOL Just remember, those numbers are a monthly average. The entertainment section includes things that really skew the totals — like our family summer vacations (which last year included a two-week stay in Washington D.C. and the East Coast) and several concerts. Misc Home Expenses was another area that had a big monthly total — that was skewed by remodels to our kitchen and our two bathrooms. The “Other” category includes donations to charity and other catch-all stuff not covered in the other categories. :-)

      • 20

        Carly says

        I knew I’d be a total HARPY if I’d gone so far to mention a ‘Charity category’. (And I sure wanted to stay welcome in your Blog ’cause we all need you.)
        Should have know you were ONE OF THE GOOD GUYS.

    • 24

      says

      Hi, Kate. Anything that is used to make the house a home. This year it included all the costs of our kitchen and bathroom renovations, indoor and patio furniture, landscaping, pots and pans, wall clocks, etc.

  18. 25

    valleycat1 says

    I’m curious how you could expect to cut some of these expenses as deeply as you project. Some of the categories you propose partial reduction on seem to be fixed monthly plans – how do you just reduce those? We have no way to cut our water/trash/sewer bill, for example. We have a basic satellite plan, so it would either have to go completely or remain at 100%. And to slash utilities (at least by the amounts you’re projecting) when you’ll be staying at home more & cooking in more – is that realistic?

    It think if I’d done this exercise & saw items that could be slashed to 0 or 25%, that I’d be revising my regular budget to reduce spending in those areas to some degree immediately – if I could live on 50% of the current budget for the short term, I could probably cut back at least 20% without suffering.

    • 26

      says

      Good questions, valleycat1. Well, the water bill can be cut by reducing the amount of water we use. By taking shorter showers, stopping lawn watering, and being more conscious of how we use our water in other ways I think I can reduce usage by 25 percent. :-)

      Our satellite plan includes several premium options that we can cut out, including the $40 or so we spend each month for on-demand satellite movies; the most basic bare-bones plan is less than $25 per month.

      As for the utilities, we already eat in six days a week, so that ain’t going to be a big deal. But more importantly, we waste a lot of energy in my home — I’m constantly on the kids to turn off lights and the television, computer, etc. I am absolutely positive if I got draconian, we could cut our electricity bill by 25 percent.

      You make an interesting point about potentially looking in to slashing spending 20 percent in some areas. Some places that may work, other places, not so much. :-)

  19. 29

    Floridian says

    We are going through my husband’s unemployment period, and even with savings it is scary. Here, max unemployment is $1100 a month before taxes — our COBRA for his insurance would have cost $1378 a month. We switched to my company insurance, at about $400 a month, but it has an individual deductible of $1500 each person, $3000 per family, which is rough to pay on unemployment. I work, but only bring home $1700 a month for full-time work. I can’t get overtime. We both have chronic health conditions that are quite treatable, but expensive to treat. We fortunately have no car loans or consumer debt, but we have a mortgage.
    When you factor in what you need during unemployment time, let me warn you to factor in “Oh No’s”. In the first 30 days after my husband’s paychecks ended, the water heater went out, my car developed a problem, a beloved pet required emergency surgery, my husband had a never-happened-before health crisis requiring diagnosis and treatment, and a family member’s very serious illness required much travel, eating out, etc., for two weeks. You may think you have enough saved, and find out that you don’t! I’ve sure watched our melt away.

    • 30

      says

      You know, you make a great point about the “oh nos!” It’s funny how those always seem to pop up at the most inopportune times, isn’t it?

    • 32

      says

      I guess I don’t understand your logic, Val. Are you saying that if I had subjected my dog to a couple of unnecessary surgeries to bring the vet bill up to par with the sum total of my wife’s biweekly manicures, that would be okay? Really? (This is a budget and most of that money is related to grooming costs anyway; we can bathe and pretty up the dog ourselves in a money crisis. There are $200 there budgeted for the vet. Odds are that would be sufficient.)

  20. 33

    Val says

    Didn’t realize it was mostly for grooming expenses in which case I agree. No reason for that in a financial crisis. Also didn’t see the separate $200 category for the vet as it seemed that the $16.74 was for both the vet and the groomer. Apologies to you and your wife for my harsh response to your post. Sadly, I have seen too many cats and dogs returned to shelters in the past few years and euthanized because their owners did not make them a financial priority. Makes me sad beyond words – thus my knee jerk reaction to your post. I now realize that this doesn’t refer to you and your family. Think your post was great otherwise and hopefully you will never have to use your layoff budget.

    • 34

      says

      No worries or apologies needed, Val. :-)

      I am a big animal lover too. Like I said, it’s a budget, but budgets can be broken or reconfigured to meet emergency needs.

  21. 35

    Patricia says

    Just curious about what state pays $2000/mo. unemployment? Over the past 20 yrs., my husband has been unemployed in 5 states (for several times in 2 of those)and he’s recieved (max benefit) between $750 and $1800. We’re ants — unemployment (for as much as 10 mos.) is a way of life. And we’re about to do it again (employer heading toward bankruptcy and job search not yielding anything yet.)

    • 36

      says

      California pays almost $2k per month (i.e., $24,000 annually) — and that doesn’t even put that state in the Top 5, which are:

      1. Massachusetts pays up to $48,984 per year.
      2. Rhode Island (up to $34,320 annually)
      3. Connecticut (up to $30,888 annually)
      4. New Jersey (up to $30,368 annually)
      5. Pennsylvania (up to $29,432 annually)

      Hang in there. I wish you nothing but the best of luck in your job search.

      Source: http://fileunemployment.org/unemployment-benefits-comparison-by-state

  22. 39

    Grace says

    Thank you for the information. I am curious about your ‘eating out’ expenses because I did not see it in your spreadsheet. Our family eat out a lot so I wanted to see how much is a ‘normal’ budget for eating out.

    • 40

      Len Penzo says

      Grace, our restaurant expenses are buried in the entertainment and ATM expenses. For a long time, we simply budgeted $100 per month for eating out. As my income has now become larger with time, We no longer have a set budget, but we tend to eat out once a week now and I suspect we’re spending $200 per month doing it.

  23. 41

    Money_Illusion says

    Hi just found this blog and really love the budget honestly and advice you’re sharing. My budget suggestion is to try out for a couple of months the pared down budget and see if it’s really feasible. Don’t wait until you’re laid off to see if it’ll work. Plus I’d get rid of the cell phone and the satellite tv. Can you use the bus or carpool? That would really cut down your transportation costs. If your cars are paid for can you drop your car insurance to liability only? That saves 50% or more. At my household we really attack expenses and take advantage of all the free stuff on the internet (Hulu, Skype, etc). I also do weddings and other photography work on weekends so have a side business in case I’m laid off. It’s good money and I just save it up for a rainy day. Anyway multiple streams of income and low expenses is what I think everyone should shoot for.

    • 42

      Len Penzo says

      I love the idea of a trial run budget, Money_Illusion. I may actually try that idea out in a couple months just to see the impacts on us. I suspect some things will have to be “simulated” though — for example, I am not in a position to cancel our cell phone contract, nor am I willing to eat the penalties, just to run a fire drill. But I can take away everyone’s phones. I need to talk this over with the Honeybee, but I really like the idea.

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