Making the Most of Severance Pay

Losing your job is never easy, but the good news is that in some cases, it comes with a silver lining: severance pay. This lump sum of money can help ease the transition as you search for a new job, pay bills, or invest in your future. But before you run off to book a trip around the world, there are a few things you need to know about making the most of your severance pay.

First and foremost, let’s talk taxes. How much severance pay is taxed? Well, it depends on your state, but generally, severance pay is subject to federal, state, and local income taxes, as well as Social Security and Medicare taxes. That’s a lot of taxes! So, before you start planning how to spend your severance pay, make sure you factor in taxes.

Now that we’ve got that out of the way, let’s dive into the dos and dont’s of making the most of your severance pay.

Do: Create a budget

The first thing you should do when you receive your severance pay is to create a budget. Determine how much money you have, how much you need to cover your living expenses, and how much you can afford to put towards savings or investments. It can be tempting to splurge on a fancy vacation or a new car, but remember that severance pay is meant to help you through a period of unemployment. So, be mindful of your spending and prioritize your needs over your wants.

Don’t: Rush into a new job

It can be tempting to jump right into a new job after receiving severance pay, but it’s important to take some time to reflect on your career goals and consider what kind of job would be the best fit for you. Take advantage of the break to recharge, reassess your career goals, and explore new opportunities. Remember, it’s not about finding just any job, but finding the right job.

Do: Consider additional sources of income

Severance pay is a great start, but it may not be enough to cover all of your expenses. Consider other sources of income, such as unemployment benefits or freelance work. This can help you make ends meet while you search for your next full-time job.

Don’t: Ignore your debt

If you have debt, whether it’s credit card debt or student loans, it’s important to prioritize paying it off. Interest rates can add up quickly, and the longer you wait to pay off your debt, the more you’ll end up paying in the long run. Use your severance pay to pay off as much debt as possible, so you can start fresh in your next job without the burden of debt.

Do: Invest in your future

Severance pay can be a great opportunity to invest in your future. Consider investing in your education, whether it’s through a certification program, a degree, or attending conferences and workshops to gain new skills. This can help you become a more competitive candidate in your job search and increase your earning potential in the long run.

Don’t: Forget about taxes

Yes, we already talked about taxes, but it’s worth mentioning again. Depending on how much severance pay you receive, you may be pushed into a higher tax bracket, which means you’ll owe more in taxes. Make sure you set aside enough money to cover your taxes, so you don’t end up with a surprise bill come tax season.

Do: Network, network, network

One of the most valuable things you can do during a period of unemployment is to network. Reach out to former colleagues, attend industry events, and join professional organizations. You never know who might be able to connect you with your next job.

Don’t: Panic

Last but not least, don’t panic. Losing your job can be stressful and overwhelming, but remember that it’s not the end of the world. Take some time to relax, focus on your well-being, and approach your job search with a positive attitude. With the right mindset and a solid plan in place, you’ll be back on your feet in no time.

In Conclusion 

Receiving severance pay can be a great opportunity to take a break, reassess your career goals, and invest in your future. By creating a budget, considering additional sources of income, paying off debt, investing in education and skills, networking, and staying calm, you can make the most of your severance pay and set yourself up for success in your next chapter. And don’t forget about taxes! By being mindful of taxes and setting aside enough money to cover them, you can avoid any unpleasant surprises down the road.

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