Making the Most out of Severance Pay

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You might not always see it coming—a layoff, a redundancy, or a mutual parting of ways with your employer—but when walking away from a job means a severance payment, you need to be thoughtful with your next steps.

Whether it was offered or whether you negotiated for it, a severance package can be so greatly beneficial. But it’s also often a lump sum of money, and as with any lump sum of money, thinking ahead is essential.

What Should You Do with Your Severance Pay?

  • Do not immediately spend it!

    Use it for bills and necessary expenses, of course, but a severance payout does not mean that it’s time to book that great vacation you’ve been thinking about or to make risky investments. Your first step should be adjusting to your newfound circumstances, not action.

  • Consider your new financial situation.

    Does your weekly budget need to adjust due to a smaller amount of money available? Do you need to think about stretching your dollars? If you’re still financially comfortable, how long will you be secure before a new paycheck becomes a necessity? Know these answers before making any major adjustments to your lifestyle and spending habits.

  • Save six months of expenses.

    Hopefully, you already have savings that covers three to six months of your living expenses in the case of an emergency. If you don’t, maybe your severance is your opportunity to create that buffer for yourself. As you’ve seen with your new situation, you don’t always know what life will bring your way. It’s always best to be as prepared as you can be.

  • Invest in yourself.

    Will a new certification or training better your future employment opportunities? Will hiring a coach or an editor help your resume? Does going back to school make sense for your life goals? Having funds and free time might be the perfect combination for these next steps if the rest of your life is in financial order.

  • Pay down debts.

    Car payments, credit cards, student loans, mortgage payments—no matter where your debts may be, perhaps your severance can work toward lowering or erasing them. Again, this shouldn’t be the first big spending decision that you make, but if you’ve already analyzed your financial position, removing the burdens of some or all of your debts can be significant.

  • Give yourself permission to think of big ideas.

    If your severance allows for financial freedom for a little while, take advantage of the opportunity. Don’t just have a month-long Netflix binge. Think about what you want out of life and your career. What could you do to bring you closer to those goals? Is it time to start your small business? How can you create multiple income streams? Make lists. Brainstorm ideas. Remove the word “impossible” from your vocabulary. Of course, this circles back to item #1: Don’t spend all of your money on a new scheme that you haven’t thoroughly planned out. However, if your everyday expenses, emergency fund, and debts are in a comfortable position, perhaps a severance payout is not a door closed but a major door opened.

Leaving a job is a moment of huge adjustment. Your schedule is disrupted, as is your financial strategy. But know that your next steps can be powerful if you take the time to move in the right direction. You can be secure. You can be savvy. You can be a success in ways you’ve never dreamed.

If you need a partner to talk about your financial options after leaving a job, Call Federal has a whole team of Certfied Credit Union Financial Counselors ready and willing to chat with you about your transition, free of charge. Contact us today. We’re here to help!


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