How To Manage Your Severance Package Wisely

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As I wrote in this post, the economy is not doing great, and the result of this has been people getting laid off from their jobs – a trend that is expected to continue for the next couple of years. Sometimes, getting laid off comes with a severance package, a form of lumpsum payment from the company to enable you to land on your feet. While this in no way compensates for the loss of a consistent income, it is significant and can go towards funding your journey to self-reliance or starting you off on major investments. Since layoffs are largely unexpected, few people know what to do with the severance pay once it is received. This post contains some ideas. You are welcome to share your ideas and experiences in the comments section or on my social media pages.

1. Hide the money

Having an unusually large amount of money in one’s bank account does crazy things to our brains. You start chipping at it subconsciously and in no time it is all gone. The first step once you receive the package should be to open a money market account and transfer it all to that account, leaving only what you need for expenses for the next month. Send me an email if you would like recommendations on a reliable money market provider.

2. Pause

Getting laid off is disconcerting. The knowledge that there will be no paycheck coming in 30 days can cause you to panic and go all out to replace that paycheck as soon as possible. Assume you are on a 30-day unpaid leave. Take time to rest and also think about the direction you want your life to take. You are likely to be choosing between two options:

Start looking for a job in the same industry or a different one
Go into business for yourself, using your severance pay as starting out capital

3.Take an account of your finances

During the time off, do a “state of the money” with yourself. This means analyzing your assets (what you own), liabilities (what you owe), and your expenses (what you spend money on). Critically look at areas where you could save money on, especially the big expenses that you took on because you had the comfort of regular pay. Do you need to move to a smaller house? Does it make sense to downgrade the car? Do you need to scale down black tax – money you give to relatives on a regular basis? Once you have considered the lifestyle changes you need to make, compare your revised budget to your severance pay. If you chose not to work, for how long would it sustain you? Compare this period, with the average time it would take you to get another job in your field if this is the path you want to take. Finally, take a critical look at your debt, and rank it by the amount on one column, and by the interest rate on another.

4. Manage your debt

If you have some debt, you need to be smart about it. There are three ways to handle debt after a lay off:

Pay it off: This means making a lump sum payment of your outstanding debt. While this may be attractive because it means proceeding with no obligations, it also means significantly decreasing your safety net. This strategy is advisable for your high interest, low-amount loans such as mobile loans. They will not take much to pay off, will save you on interest fees, and will be a source of credit you can tap into later.
Renegotiate: This entails explaining your circumstances to your creditors and requesting for an extension of the payment period, or even a payment holiday. I believe that you can renegotiate any debt, provided you do so before defaulting. This includes bank loans. Right after you are laid off, speak to your bank manager and give them a few options (repayment holiday, a pause on principal payments, a reset or extension of the repayment period etc). Always start by asking for the most generous of terms, and then working towards a compromise. For example, you could ask for a 6-month repayment holiday, to which they are likely to make you a counter-offer. Go with the option that minimizes your monthly repayments and gives you as much flexibility as possible.
Pay it down as planned: If your loan repayments are not significantly high, you can choose to pay them down as per schedule. This means setting aside some of your severance pay to go towards servicing the debt.

5. Act

After your month of rest, you should have some clarity on what you want to do next. Act decisively. If you plan to go into business, do thorough research and start out. I highly recommend the Lean Startup approach for businesses of all kinds. Test the market by making minimal cash investment, and grow slowly. If you are job hunting, revamp your CV, activate your connections, and be persistent in applying for jobs.

6. Seek advice

Getting laid off can be isolating. You lose your work community, and some times even your social circle falls off. As alone as this might feel, what you are going through is not unique. Others have been laid off and come out on the other side as successes. Talk to people, including professionals such as career counselors (if you are looking to make a career change), personal financial advisors, and people doing the business you want to go into. Learn from others’ lessons and mistakes.

The most important thing is to have a handle on your emotions. Do not panic and spend the money without fully considering your options. On the other hand, do not get so excited by the amount, into thinking that it will last a long time no matter how you spend it.