Getting laid off is stressful for workers, especially those with families to support and a mortgage to pay. After experiencing a job loss, many individuals are particularly mindful of how to spend their severance pay. There is no one-size-fits-all answer regarding how these funds should be allocated, and how consumers decide to spend their severance should largely depend on their particular financial situation.
Following a job loss, individuals should make a list of their monthly expenses as well as any income sources they have, including unemployment compensation, savings, emergency funds and the like. Most financial experts encourage the newly unemployed to rely on their severance package first to meet their immediate needs – rent or mortgage payment, food, gas, bills – before cashing in other income sources. Relying on severance pay to manage immediate expenses gives households time to develop a money management plan for the upcoming months in the event that they have not found a new position by the time their severance runs out.
To stretch that resource for a longer period of time, consumers should start contacting service providers to make changes to their lifestyle. Canceling cable and relying on cellphones, rather than a landline, may help lower costs. Comparing utilities providers to ensure they have the most affordable plan can also be helpful. Borrowers who are carrying high-interest credit card debt should also contact their lenders to explain their situation. While issuers may not give them a pass on paying their bills, they may have payment alternatives that can be helpful.
The same method should also be followed for federal student loans. There are several different repayment options that rely solely based on income. In the event of a job loss, it may be necessary to switch to an income-based or income-contingent repayment plan to avoid defaulting on a loan.
Lastly, it can be useful for consumers to enroll in credit counseling immediately following a job loss and drying up of a severance package. Licensed professionals can look more closely at a household’s finances and obligations to help them make better determinations about how to manage their spending while seeking work. This can be particularly helpful for those with special circumstances, such as medical bills, adult children or parents living in the same household.