When Carlos Pero learned his job would be eliminated, he took some comfort in learning he would receive three months' severance. But making that sum last has been more challenging than expected. Even with his wife working, the bills are coming due faster than the job interviews.
"Now, it's all about trying to make and save money wherever we can,'' Pero says.
As companies cut employees, many like Pero find surviving on severance requires a take-charge attitude, time management, communication with your spouse and some heavy-duty budgeting. It also takes immediate action.
Shocked and numb? Don't even consider chilling for a while. Thinking about investing to stretch your severance pay further? Probably not a good route, either.
The average severance ranges from 12 to 14 weeks, depending on position and seniority, reports outplacement firm Challenger Gray & Christmas. But competition for jobs is fierce: A staggering 4.4 million workers have lost jobs since the recession began 15 months ago, with 651,000 jobs lost in February alone.
Clearly, focusing on the job search is hard when you're worried about paying the rent, so addressing financial realities needs to come first. If you are married or in a relationship, start with a conversation about budgeting and time management.
- If you know you're going to fall behind on your mortgage, car or credit card payments, contact your creditors in advance. They might be willing to work with you.
- Financial planner Charles Sachs of Evensky & Katz cautions against acting in panic as severance runs out. Only take a loan on your credit card as a last resort, he says: "If you will start a new job in few weeks, it's OK to borrow and pay high interest. But if you have no idea when new money is coming in, don't do it.''
Indeed, Pero says that has been his biggest challenge living off severance. His wife is working in a school. Though the two agreed to cut all discretionary spending, it took some working through to agree to cancel a spring break trip with their son.
To start, figure out what your former employer owes you, your unemployment pay, and income from other workers in the family. Anyone receiving severance may also receive unemployment benefits, up to 26 weeks, and in some cases, extensions for another 13 weeks. Still, few people these days have emergency reserves that will last them long enough to find another job.
Next, list necessary expenses and eliminate the unnecessary ones. Compare your income to expenses to get an idea of how long you can survive. Think needs like food, not wants like cable television. Consider shopping around for low-cost health plans that are more affordable than continuing employer coverage under COBRA.
Financial planner Andrew Horowitz advises plunking your severance into high interest money market accounts, rather than a certificate of deposit.
"The rules are different now,'' says Andrew Horowitz. "Under no circumstance should you do anything with your severance package other than put it in a safe and liquid place.''
Horowitz says in some cases, he even advocates spending … on technology. "Better technology gives you better reach to find a job or stay connected.''
Leslie Padilla isn't ready to resort to another career but she is making some drastic changes as her severance money dwindles. Padilla had been with Comcast six years when she was laid off in January. The public relations professional says it took her two months, while still employed, to digest the news. But as a single mother living on five months' severance pay, she has she's moved into action.
She came up with a budget, and pared expenses … way down. She cut her nanny to part time, sharing her with another laid-off mom. She also moved in with her mother and swaps hand-me-downs with friends. Her nights are devoted to job hunting online.
One thing Padilla refused to cut was the cost of networking. She regularly takes contacts to lunch and attends networking events. And she has taken advantage of the career counseling service Comcast provided to update her resume and print business cards at her former employer's expense.
"It was hard to get my head around it at first, but I have to plan for a long transition phase,'' she says. "At this point, it's about riding it out.''