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After I was laid off this year, the only solace was hearing I’d get post-job wages for essentially doing nothing. But the sudden injection of cash flow in my bank account vanished as quickly as it came. The culprit? An unexpected plumbing bill, that rascally student loan monthly payment, and my attempt to live like I won the lottery. (Which for me, means taking Uber rides instead of public transit.)
In hindsight, I’ve learned that bracing yourself for a sudden layoff goes beyond job hunting. Having a financial plan can pay off, especially when a severance package is offered. Whether you’ve been recently laid off or just want to be prepared should it happen to you, here’s how to make the most out of your severance package.
The obvious decision is to make sure your financial windfall doesn’t run out. Severance packages shouldn’t be treated as lotto winnings; they’re meant to tide laid-off employees until their next job. In the long run, putting pay away can help make day-to-day expenses manageable.
How you save should depend on when your package is paid. According to the Financial Consumer Agency of Canada, employers can dole payments as a lump-sum or in installments over a period of time.
Severance pay counts as income, which makes it taxable. As Turbotax notes, you can reduce taxes by directing your package into a registered retirement savings plan (RRSP) or a pension plan. Asking an employer to spread out severance installments over calendar years can yield higher tax savings as well, but it would depend on how future earnings affect your tax bracket.
2. Pay off debt
Chances are, you owe money. The average Canadian consumer has over $22,000 in debt, not including mortgages. If you feel secure with your current savings, clearing lines of credit would squash interest rates. For more savings, those with student loans can apply to Canada’s repayment assistance program to lessen or freeze monthly fees.
3. Start a business
If you’ve spent time planning and dreaming about starting your own business but never had the funds to launch it, a severance package could be the down payment.
Now more than ever, Canadian entrepreneurs are making their passion projects profitable. Many startups fail because would-be business owners take out loans from banks, family, and friends that they can’t reliably pay back. Overcoming financial startup hurdles with capital you already possess would provide your venture with a practical boost.
Another bonus: being your own boss means you’ll never get laid off.
4. Go travelling
With accounts settled, sometimes the smartest way to spend severance pay is to take a vacation.
While your first instinct after getting laid off might be to dive into the job hunt, you could be missing out on the best time for a dream getaway.
The bustle of full-time work means little time to hop off that treadmill and re-evaluate. Travel can be a valuable reset button, giving you a chance to reflect on your next steps before you re-enter the workforce.
Tip: To avoid feeling out-of-work anxiety when you’re supposed to be on vacation, set up a couple of strategic interviews or coffees in your calendar for your return.