Don’t Squander Your Severance Pay
Posted on November 24th, 2010
Losing a job can be one of the biggest financial crises anyone faces during their lifetime. One day, you’re financially stable and the next you’re unsure you can make next month’s mortgage payment. Getting through an extended period of unemployment can be really difficult if you’re not prepared, so when your employer at the very least offers you aseverancepackage, you need to know how to make the most of it.
What Is Severance Pay?
When an employee loses a job, usually for a reason out of their control like downsizing, their employer may offer them money or other financial assistance to help them survive until they find a new job. In many cases, a displaced worker willreceiveextra pay, though it is also possible to have benefits extended or be provided some other form of compensation. Other forms of severance pay include:
- An early retirement option
- Education/job retraining benefits
- Career counseling
The Typical Severance Package
First of all, there is no law that requires employers to provide severance pay of any kind. So if you get it, you’re already much better off than many of your unemployed peers. Secondly, severance pay vary greatly by employer and it’s difficult to define what the average package looks like.
Usually, however, employers base severance packages on length of service. In most cases, the longer you’ve been an employee, the bigger you can expect your severance check to be. Generally, after you’ve met a minimum amount of time with a company, severance is paid out as two to four weeks of salary for every year you’ve put in.
Maximizing Your Benefits
When you are let go from your job, you don’t have to take what’s offered–there is some room for negotiation. Negotiating severance pay can help you get what you need most to make it through the unemployment period. For instance, you might prefer extended health insurance coverage instead of a couple weeks’ salary. It’s okay to ask for it when your request is fair.
If you decide to accept the severance package offered to you, be sure you understand the terms very clearly and take advantage of the benefits right away. Especially in the case of downsizing, early retirement or educational assistance options might disappear due to further cost cutting if you wait too long.
Most importantly, however, is the need for stringent budgeting. Money is going to be tight and you have no idea for how long. You could find a new job in a couple of weeks or maybe not for several months. Whatever your severance package offers, you’re going to have to make it last as long as possible.
How to Budget Severance Pay
It’s important to find out how you’ll be compensated since this will affect your budgeting strategy. Severance pay is either distributed on an ongoing basis or in one lump sum. If you get it all in one payment, you need to be very careful you don’t blow through everything right away. Serious willpower and a strict spending plan will be required to make it last.
On the other hand, if you are going to be receiving benefits over time, your chances of obtaining supplemental benefits are greatly reduced. Some states view severance benefits as a form of salary and therefore, will not award any unemployment benefits. If you have an option between the two, consult a professional to find out which one will work in your favor.
Understand that getting a big check for being laid off isn’t license to go on a shopping spree or vacation. Severance pay is a tool to help you transition jobs more easily and will not be enough to last very long. In order to be best prepared for job loss, make sure that your emergency savings account is padded well enough to fill in any gaps your severance package leaves, which it very likely will.
Casey Bond has a long professional history in the finance industry. She worked as an assistant in a successful financial planning firm for many years while obtaining her B.A. in English. She then went on to obtain a degree in Publishing and was eager to change career paths.
That’s when Casey joined the Go Banking Rates team, ready to meld her interest in finance with her passion for writing. Now she strives daily to bring readers the most compelling and topical banking information while battling a personal addiction to shoes and handbags. She is making progress and takes it one day at a time.
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