What’s a Layoff Fund? Here’s How Much Money to Save and Where to Stash It

A layoff can really shake up your finances. 

I know the feeling well. I was laid off in my early 20s with three months of severance and no idea how I’d land a new job before the checks stopped rolling in. I didn’t have much savings stashed away, and an emergency fund hadn’t ever occurred to me. 

With job cuts on the rise, CNET recently covered how to prepare for a layoff. One of the most important takeaways is to build an emergency fund while you’re still employed. I’d recommend a layoff fund too. 

If you lose your job, you want peace of mind that you’ll be able to cover necessities like housing, food and bills. A layoff fund is money specifically set aside in case you can’t get employment for several months. The fund can even help you with job-hunting expenses. 

Preparing for the unexpected can be scary, but it’s important to start saving now and to put your money in the right savings account. Here’s what I’d recommend. 

What your layoff fund should cover

To start building your layoff fund, look at your personal circumstances. Factor in the monthly expenses you cover now, accounting for everything from groceries and rent to gas and utilities. Also, consider how you’ll pay off debt or any new expenses that might come up. 

For example, if you’re currently receiving health insurance through your employer, you might have to enroll in a marketplace health care plan or jump on a family plan. If you’re able to continue your employer’s health insurance coverage through COBRA, you’ll want to have enough money to cover that cost out of pocket.

How much to stash in your layoff fund

ZipRecruiter career expert Sam DeMase says you should expect to remain unemployed at least three to 10 months after a layoff. Saving a large amount of money to stay afloat for a year can feel impossible, but every small contribution can help. 

If you have extra time or resources, a side hustle or part-time job can help you shore up your layoff fund sooner. Also, look at what you can cut from your budget now, like subscription services, dining out or even vacations. 

Your emergency fund can serve as your layoff fund. If you don’t have an emergency fund, start there. However, if you already have a well-stocked emergency fund, putting extra savings in a separate layoff fund should give you some peace of mind. 

Where to stash your layoff fund 

You never know when you’ll be laid off, so it’s best to keep the funds easily accessible and liquid. I recommend a high-yield savings account. 

Here’s why: You’ll earn interest on the money you’re setting aside. Currently, many online-only banks have annual percentage yields between 3.50% and 4% APY, which can help you get better returns on your money than a traditional savings account. 

For instance, if you deposit $100 into an account now, and contribute $100 a week for the next six months, you’ll have saved an additional $2,400. If the account has a 3.6% annual percentage yield, you’ll earn close to $20 in interest, bringing your balance close to $2,420. 

That might not seem like much, but if you make the same deposits into a traditional savings account with a 0.02% APY, you’ll earn only pennies in interest. Also, make sure you’re not losing money by paying a monthly maintenance fee on the account. 

Savings rates are variable, so how much you earn in interest could change over the next several months. 

Regardless of the APY, what matters most is saving what you can now to prepare for the unexpected.