The economy has not been performing 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 a compensation for a steady income, but it can be a substantial amount that can help start a business or make a major investment.
I have seen in the past where people get a lump sum of money and go 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.
What is a severance package
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 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
Managing your severance package
Whatever you decide to do, make sure it makes you happy
~ Paulo Coelho
Your bank account balance might be bigger than you ever imagined, hence the need to save 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 save 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, take 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? Maybe 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 as 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?
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.
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 save 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.
During your break, 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 a lay off is not an easy journey. Do not let the severance package excite you into a spending spree or let the situation drive you into depression. Take a break, strategize, take notes of your situation and finances, and come up with a way forward. Most importantly, surround yourself with people that offer you emotional support.