Unfortunately, many Americans have had to grapple with unemployment the past few years. The ones who received a healthy severance package at least got a bit of breathing room.
Workers who get enough of a severance to cover several months of living expenses should quickly create a plan to make it last as long as possible. If you haven’t totaled up your essential monthly expenses, this needs to be done right away.
Let’s say your monthly living expenses can be trimmed to $1,000 in necessities and your severance is $6,000. That is a reasonable budget that allows six months for a job search without tapping into savings or going into debt to pay living expenses.
You should treat your severance as a means to keep yourself afloat, not as an opportunity to take a vacation. It is important to live very lean until you have replacement income.
If you receive a lump sum severance payment, you will need to be disciplined and avoid treating the money as a windfall.
You should deposit the lump sum cash in a savings account, then transfer just enough to a checking account to make payments when needed.
The ideal budget for a severance package would be to not spend any of it on living expenses. People who quickly find a new job, or have created adequate emergency savings prior to a layoff, are in a good position to do this. By adding severance money to existing savings you can better weather the possibility that your next job won’t pay as much as the one you just lost.
Of course, many employers don’t offer generous severance packages. If you work for an employer that will only offer a few weeks of severance pay, do everything you can to keep your job and make building up savings a top priority.
If you lose your job, educate yourself about the resources and benefits that may be available to you. Contact your local state department of labor to learn how to qualify for unemployment. Many times those departments offer career counseling, resume coaching and other support for the unemployed. Don’t be too proud to take advantage of those services.
And if your employer offers anything other than money as part of the separation, be sure to take them up on it. Severance packages often include career coaching, employee assistance programs and continuing health insurance at lower rates than individuals can negotiate.
I hear sad stories from credit counselors all the time about people who had good incomes, were laid off and then failed to make lifestyle changes to adjust to the situation. They sought out a credit counselor only after they financed living expenses with credit cards, ran through their retirement savings or fell behind on their mortgage — and sometimes all three.
So there can be dire consequences if you don’t stick to a lean budget after you’ve lost income.