By John Drachman
While the nationwide unemployment rate settled back to 7.9 percent in September from its 14.7 percent spike in April, it doesn’t help if you are one of the 2.41 million earners who are currently unemployed.
If you received a severance package, though, you’re still technically “in the money” at least for a while.
While severance is often paid as a lump sum, it can be paid out in installments too. With a lump sum payment, you may be entitled to unemployment benefits after you’ve received all of the severance payments. Severance that’s paid in installments, however, could compromise your ability to collect those benefits since you’re still receiving a steady stream of income. But there’s a caveat: The laws vary by state, and in some parts of the country, severance is not considered earned wages for the purpose of collecting unemployment benefits.
LaCinda Glover, a senior principal at human resources consulting firm Mercer, says that the pandemic has caused many companies to loosen the purse strings on severance packages because COVID-19 has made the lives of so many employees unpredictable. “We see organizations trying to do the right thing,” she said. “I know a lot who say… that if they can afford to pay them a benefit, they will.”
Regardless of the size of your severance, though, the urge to treat it as a choice windfall for your next big purchase should be resisted. According to HR specialists and financial experts, there are three good reasons to hesitate:
- Better to invest: For high energy job seekers with good prospects, severance packages can be quickly deployed as found capital for investment opportunities. “You can still usually take that severance check and earn money elsewhere,” says Ms. Glover. “Apply for unemployment insurance (if you can) and apply for jobs. Companies in in-demand sectors, like health care and IT, are hiring.”
- Add to emergency funds: Financial guru, David Ramsey urges job seekers to keep their severance award safe and liquid and avoid paying down debt. “When you’re in the middle of an emergency, you usually don’t pay down debt—you preserve and reserve cash to make sure to make it through the emergency.”
- Do nothing first (and then think big): Blogger Financial Samurai says he boot-strapped his online enterprise with his severance package. “During your one month plus long of doing nothing with your money, you should create a spreadsheet and list all your spending,” he says. “If your financial windfall is sufficiently large ($100,000+), consider hiring a fee-only financial advisor to help you set up a framework to make your money last.” If the metrics are right, he added, a sizeable severance can provide the seed capital for a new venture – just like he did.
There will always be the temptation to spend money if it’s readily accessible. Having a financial coach in your corner though can keep the focus on developing a severance strategy that’s in step with your unique tolerance for risk, circumstances and objectives.
John Drachman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. John is an IABC award-winning writer, who applies his 30 years of financial marketing experience toward advancing the dialog between investors and investment professionals.
