Avoid the Severance Pay Trap
Updated: Feb 5, 2022
In my opinion, two of the easiest things to do are gain weight and overspend. The latter is even worse if you’re spending money without having a steady replenishment cycle, i.e. a regular paycheck. Many people innocently fall into troublesome spending habits because of two words – severance payments. While these payments can be a significant blessing after being laid off, they can become a trap if you don’t carefully plan how to use them.
“How can this be?” you might ask. “What could possibly be wrong with receiving a little extra cash at a time when I need it most?”
This is where planning comes into play, starting with launching your new job search immediately (please see this blog post for the reasons why). While it might be tempting to live off of your severance for little while, this can be risky because there are no guarantees about when you will land your next job. Let’s say that you receive a two-month severance pay and you live on that severance for two months; what happens when that eight week runs out? If you haven’t started an immediate job search, you might be in a situation where you either have to dip into your personal savings account or charge new expenses on your credit card. Even worse, you may begin to panic.
This is particularly challenging for those of you who have received significant severance agreements, like a six-month or 12-month severance (yes, these do exist though I’ve never personally received one that large). With this large amount of cash coming in – oftentimes in one lump sum – it can be easy to say, “I don’t have to worry about a job for a while; I have more than enough money to get by for the next few months.” And this is true.
However, the problem comes with overspending. Most of the time, if you’re not working or busy with some other priority, it’s easy to spend your idle time spending money (please re-read the first sentence of this post). For example, if you normally live on a budget of $3,000 monthly, and you receive a lump-sum payment of $18,000 (6 months of severance X $3,000) it can be very tempting to spend more than you normally would. The most common “newfound” expenses that I’ve heard of include:
A vacation to help you relax after the stress of layoff – This is a good idea in theory, but if that vacation is to an all-inclusive resort for $2,400 and you’re using your severance to pay for it, you’ve already dipped into nearly a full month of your severance, though you’ve only been laid off a few weeks.
Eating out – It can be fun to relax with friends and family by enjoying a great meal. For those of us who are very social, this can include meeting friends for breakfast, lunch, dinner and or/happy hour. All of this extra spending is beyond what you would normally do, and if you’re using your severance funds to pay for these meals, you risk running out of your severance money early.
Shopping (online or at the mall) – It can very tempting to look at items and order them because you have the extra time on hand. You might also tell yourself, “I’ve been through so much, I deserve to splurge!” The risk, again, is spending more than you normally would and running out of your severance money faster than you should.
I am a big fan of severance payments and offer various ideas on how you can maximize them so they remain a blessing, and not a trap. However, if you've already started spending too much, it's not too late to recover. Check out these tips to learn how to Maximize Your Severance Payments.