4 Easy Steps to Manage Your Severance Package Like a Pro
The economy has not been doing well, and people have lost jobs for the last couple of years. With the Coronavirus pandemic in play, the situation is worsening. It will take time before the economy recovers, and we are still in a position where companies might downsize. In some cases, one might get a severance package. How do you go about managing your severance package?
In no way is this compensation for a steady income, but it can be a substantial amount that can help start a business or make a major investment.
But it is like human brains stop functioning the minute lump sums of money are involved. I have seen in the past where people get a lump sum of money and went on a spending spree. In no time, you will be back to point zero, with no money, no job, and probably depressed trying to figure a way out.
I am hoping this post will give you some ideas on how to manage a severance package. If you have more ideas or experience, feel free to share and let’s learn together.
In Kenya, severance pay is what your employer is mandated by law to compensate qualifying employees in the event the company declares those positions redundant. Severance pay usually has;
- Payment for years worked at the rate of not less than 15 days per year – the number of days per year will vary between companies, but the minimum number of days is 15 per year.
- Notice pay, or 1 month’s pay in lieu of notice
In addition to the above, your severance package might include;
- Leave days earned but not taken.
- Baggage pay
- Any other allowances the company has
4 Key Steps to Managing Your Severance Package
The loss of your job is an overwhelming experience. However, It is not the end of the world. If you have a severance package, it’s important to take the step to plan for it to ensure you don’t use the money for unnecessary expenses.
Save!
Your bank account balance might be bigger than you ever imagined, hence the need to hide that money. Subconsciously, you will always think you have money. You will start chipping now and then, and a few months down the line, you will have nothing.
So, when you get your severance package money, the first step is to hide it in an account where you cannot use it all up. Only leave what you need to survive for the next month.
There are money market funds where you can invest the money, where interest ranges from 4% to 10%. I found this online, and it explains how money market funds here in Kenya work.
I would also recommend saving the money with a credible Sacco. Sacco’s pay dividends based on your savings or contributions per year. Most dividends rates are between 7% to 14%, pretty good money compared to what you get by fixing your money or leaving it in your bank. And if you manage to get another job or feel you can service a loan, you can borrow up to 3-times your savings.
Take a break and breathe
Losing your source of income is perturbing. You do not have an assured salary at the end of the month, but the bills will still be there. But, this as a break and just breathe. It is easy to come up with your next plan with a clear head compared to when you are worried, stressed, and all worked up.
There are 2 options to consider;
- Looking for another job
- Starting a business with your severance pay as the capital
Take stock of your finances and budget
Whether you are diving back into looking for a job, depending on a side hustle’s income, or using part of your severance package to survive, you will need a budget.
List your assets, all your liabilities, and expenses. Can you still sustain your current lifestyle? If not, what is the way forward? May be moving to a less expensive house, downgrading your car, reducing your house shopping, and any other necessary expenses.
Do you have any savings you can use an income for this period? Or a side hustle that will give you money? If you are using your severance pay, how long will it sustain you? Also, consider any debts?
Managing debts
Do you have any debts, both long term and short term? Here is how you can manage it;
1. Renegotiate
Immediately you have your redundancy letter, get in touch with your creditors to explain your situation, especially banks. You can ask for new repayment terms where the creditor extends your repayment period, recalculates your repayment amounts, gives you a repayment holiday, or pauses your principal payments.
Some loans have insurance where the bank’s insurance pays the remaining part of your loan in case you lose your job, become disabled, or die. Read through your loan terms and the bank’s policies. I have seen situations where a person who is laid off renegotiates with the bank to pay part of the loan using the severance pay, and the bank’s insurance company sorts the rest.
However, if you get another job within a specified period, you will need to communicate with your bank. Some banks only apply this in case of death or disability.
Either way, contact your bank, leaf through your loan agreement, and try to come up with a solution that does not leave you vulnerable.
2. Repaying off the loan
You can also opt to pay off the loan, especially if it is not a huge amount. This includes mobile loans or if your bank or Sacco loan is a small amount that you can manage to pay without leaving your financial position vulnerable. Such a move will pay you the stress of wondering where to get the money to pay every month and also interest fees. It will also increase your borrowing credibility so you can always go back and borrow.
3. Keep paying as usual
If you can manage, you can choose to keep repaying the loan. If you have a side hustle, you can use part of this money to be repaying your loan. You can also set aside part of your severance package to be repaying this loan while you look for another source of income to service the loan.
What Next?
During your break and breathing moment, you need to come up with a way forward. Here is where you now take action. If you have decided to get back into the employment wagon, update your CV, contact your networks, and consistently apply for jobs. If you want to start a business, be decisive about it, do all the research you need, talk to people you know in that niche, and start small.
Moving forward after lay off is not an easy journey. Do not let the severance package excite you into a spending rampage or let the situation drive you into depression. Take a break, strategize, take notes of your situation and finances, and some up with a way forward. Most importantly, surround yourself with people that care for emotional support.
Purpose
The primary market focuses on the initial issuance of new securities. This is where institutions, like governments and companies raise capital by selling stocks and bonds for the first time.
The secondary market, on the other hand, is concerned with the trading of existing securities. Investors buy and sell previously issued stocks and bonds amongst themselves without any direct involvement from the issuing companies.
