Your manager tells you they're letting you go for business reasons and slides a piece of paper across the table. It's a severance agreement. As you read over the document, you sense you need some time before you sign the dotted line.
That's exactly what you should do according to Brook Anderson, a financial advisor at Kaizen Financial Advisors.
Take it slow. Don't sign the agreement immediately. Most companies will give you time, possibly a few weeks, to look over the paperwork, Anderson explains. If it's an option for you, have an attorney review it as well. In some cases, it’s possible to negotiate the terms of the agreement.
"That window of time is there for you to learn and understand what you've been presented with," Anderson says. "To just prematurely sign on the day you're leaving the company is not a wise move."
One thing to keep in mind: everything is negotiable, according to Anderson. However, if you're part of a mass layoff, you'll likely have less bargaining power than if you're part of a small number of employees being let go, especially if the company isn't overly corporate.
"Usually, with a large company laying off 500 workers, your ability to negotiate goes down dramatically because they're probably viewing this in a big block and there's a standard set package," Anderson says. "The company would then run into potential problems by giving preferential treatment to some and not others."
However, the length of your tenure with the company can also be a key factor. "If you've been employed for a very long time, I think that's when you have the most leverage," Anderson says.
Perhaps other workers look to you for guidance or the company sees you as a brand ambassador. In those cases, it's in the company’s best interest that you leave satisfied.
Employees with a shorter history with the company may find leverage in other places. If you're receiving pay for a portion of unused sick days, you could ask for a full payout by mentioning the many times you came into the office or worked from home despite feeling unwell, Anderson says.
Try to get a manager or executive who worked closest with you involved in the discussion. "The people that can vouch for the value provided and the worth that you gave to that company can help push and nudge HR in the direction that might be favorable to you," Anderson says.
You may also want to ask for the severance pay as a lump sum rather than spread out over time, giving you access to the money now and not putting your unemployment benefits at risk.
Once you come to an agreement with your company and accept their severance package, there is the small matter of how to budget your money during this period of unemployment.
Here, we lay out the seven common elements of a severance package and walk you through creating an unemployment budget that’ll keep you afloat until you are gainfully employed again.
7 Common Elements of a Severance Package
Severance agreements are multifaceted documents. You'll want to understand every piece. Here's a breakdown of some of the most common components of such agreements:
- Description of departure. This section of the document describes the circumstances of your exit? Were you laid off due to the company changing direction or facing financial difficulties? Were you fired? It's important that this section accurately describes the reason behind your leaving, as it could have ramifications for unemployment benefits.
- Pay that's tied to length of service. When people casually mention severance, this is typically what they're referring to. Employers commonly issue two weeks of pay for every year an employee worked for the company. This payment can be doled out over time, or paid as a lump sum.
- Continuing benefits for a period of time. Your employer is required by law to offer at least 18-months of health insurance benefits at the corporate rate. This is called COBRA. At first, COBRA seems expensive. The portion of money taken out of your regular paychecks was just a piece (often roughly 25%) of your overall health insurance premiums. With COBRA, you have to pay the full premium, in effect quadrupling the monthly cost of keeping your employer-based insurance. You may also ask your employer to continue paying their portion of your health benefits, delaying the onset of COBRA until you're ready.
- Outplacement services. Would you like help finding your next job? Some employers include outplacement services in their severance packages in the form of a career coach or recruitment service, especially for their long-term or high-value employees.
- Non-compete clause. If you're viewed as a competitive threat, there will often be geographic or market-segment restrictions. "In some cases, you signed that non-compete agreement the moment you became an employee, so they may bring those back to your attention at this time," Anderson says.
- Confidentiality rules and waiving your right to sue. In exchange for taking their money, companies often ask you to not speak poorly about them and to agree you won't sue.
- Other contractual stipulations. The contract may include other language, such as a reminder to return company property, by which you must abide.
You’ve Got the Money. Now What?
"The way I think about severance is it's part of that emergency fund,” Anderson says.
Sure, if you're a well-off executive near retirement age, a gigantic severance payment could be exactly what you need to begin your golden years in comfort. However, everyone else will need to figure out how to stretch their dollar until the next job.
Anderson encourages his clients to have a minimum of three months of emergency funds saved to cover living expenses. If you have people who rely on you financially, consider setting aside nine months or more in the event of an emergency. Budget-wise, he argues, that emergency fund is where severance money should go.
"When I say 'months of living expenses,' that doesn't mean with vacations and dining out and all those extras that we all like to do," Anderson says. To Anderson, it means calculating the minimum you need to survive, without luxuries, during a time of financial hardship.
If you've built up a substantial emergency fund, you may not have to alter your lifestyle. However, for most people, right after a layoff is a critical time to take a closer look at your budget.
How to Build a Budget After a Layoff
If you've never budgeted before, the period after a layoff will be a rough but necessary step in getting control of your finances. The first part, Anderson says, is getting a handle on how much you spend.
- Examine your bank statements and categorize expenses. As a starting point, experts suggest that you print out your bank statements and categorize each item. From those statements, you’ll build your detailed budget. Begin by looking at what you must have versus what want."Maybe I'm a person who goes to Starbucks every morning and has my latte for $5," Anderson says. "Do I have to have that? Of course not."
- Cut back on the non-essentials. If you know money is going to be tight, immediately cut back on your non-essential expenses so you don't run out of money for your electric bill. Little things like making coffee at home instead of going to a coffee shop, buying a bottle of wine instead of going to happy hour, or cutting back on cable channels, manicures, and other luxury items can add up to big savings.
- Factor in occasional expenses. When building your budget, don’t overlook setting aside funds for miscellaneous expenses. Things like oil changes, for example, come up every few months, so you'll want to look over a few months' worth of bank statements to get a sense of how much you'll need to set aside for irregular-but-necessary expenses.
- Budget for the worst case scenario.While it’s important to stay positive during a job search, it’s important to consider that it could take you a while to find a new job, especially if you are seeking a more senior position."The more established you are in your career, generally, the longer it takes to find that replacement job," Anderson points out.
For this reason, you may need to make other changes to your budget as time goes on. Anderson suggests marking a point in the future in which you must take additional measures if you haven't yet found work.
- Create a Plan B."At some point, you're going to get to that point where you're like, 'Okay, I hit that wall where I'm uncomfortable with how much money I have left,'" he said. “That's when you take on a part-time job or begin driving for Uber at night while you job search during the day.”You can’t start phase two of shoestring-budget living after you hit the wall. You have to begin planning for it weeks beforehand. If necessary, consider asking family and friends for a loan or research the details of taking out an equity line of credit on your house to make ends meet.
"You don't just decide tomorrow you're going to take the money out. It takes time to get the loan to go through," Anderson says. "It takes time to get the cash."
Finally, Anderson says, you need to make your budget highly visible. Put your spending categories on your fridge or desk to keep a close eye on your spending.
Most importantly, a layoff requires an overall change in your thinking about money. "You have to change your mindset," Anderson says. "When you're in layoff mode, you're in cash preservation mode."