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A return to financial stability after unemployment takes time

Ever so slowly, the unemployed are getting hired. And if you're one of them, the next task will be to get your finances back on track.

The latest government figures show that the median length of unemployment is 5 1/2 months -- enough time without a paycheck to do a lot of damage. By then, you might have wiped out savings, dipped into retirement accounts or racked up credit card debt. Your credit record could be tarnished if you were late paying bills or defaulted.

Getting back on sound financial footing will take some time -- and a switch in mind-set.

If you've recently been rehired, here are some steps to get finances back in shape:

* New job, new budget: "Put together a budget as quickly as possible," advised Derrick Kinney, a financial adviser in Arlington, Texas. "It's important to make sure your budget fits your salary."

* Replenish emergency fund: Building up a cash cushion worth three to six months' worth of living expenses must be the top priority.

"If they don't build that emergency reserve and something happens with their new job, they will have no fallback position," said Grace Worley, an Indianapolis financial planner.

* Pay off credit cards: If you have card debt to repay, it's best for your wallet to tackle the balance with the highest interest rate first while keeping up with the minimum payments on the others.

But it's more rewarding psychologically for some people to pay off the smallest balances first. That way they wipe out some bills quickly and feel as if they are making progress.

The most important thing is that you continue chipping away at your debt, so choose the method that is most likely to keep you on course, Kinney said.

* Save for retirement: Enroll as soon as possible in your new employer's retirement plan. It might be difficult at first to save the maximum limit while, say, rebuilding an emergency fund, but contribute at least enough to get the employer match.

The past couple of years have been good in the stock market, and those who had been sitting on the sidelines might be tempted to catch up on retirement savings by investing aggressively in equities. But that's risky because stock prices can suddenly plunge. Remember 2008?

A more prudent way to catch up is to save more. If you turned 50 since losing your job, you now are eligible for catch-up contributions to a 401(k) or similar plan, Brown noted. Older workers can put away up to $22,000 a year in a 401(k), or $5,500 more than younger colleagues.

Also, check out online calculators, such as T. Rowe Price's Retirement Income Calculator, to see the impact the job loss had on your future retirement.

* Consider a line of credit: A home equity line of credit allows you to borrow against the equity in your house -- if you still have some.

You need to have a job to qualify for the credit line, Brown said. Now that you're working again, he said, you should establish a line of credit that you can use in emergencies. You can keep the line open for years without using it and will pay interest only when you tap it.

Be aware, since the credit crisis of 2008, the standards for getting a line of credit are more stringent. And, depending on the lender, you might have to pay certain fees. So shop around.

* Pull credit reports: Find out the damage unemployment did to your credit by getting your credit reports from the three major credit bureaus. Get a free copies at annualcreditreport.com or by calling 1-877-322-8228. Correct any inaccuracies.

* Avoid splurging: Resist the temptation to treat yourself to a big purchase now that money is rolling in again.

"Do something smaller but gratifying, as opposed to taking the family on a vacation that they have not had, finally redoing the kitchen or buying that new car," Worley said. "Taking everyone out to a nice dinner, fine."

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