What You Should Do And Not Do When You Are Paid A Severance Package

  • Naira
  • February 22, 2016
Have you recently lost your job and got a payoff? Did you just decide to retire ahead of time in exchange for severance or a compensation package? Whatever you decide to do with this money you are paid can make or mar you in the next few months.  Through the experiences of people who have squandered their severance money and those who made very good use of it, we provide you a  step by step guide of how and what to do when you get a huge pay off.
1. Do Not Tell Anyone – This is the hardest of all the rules and I doubt if anyone ever keeps them. However, the lesson here is that the lesser people you tell the better for you it is to achieve the goals I have listed below. Human beings have away of convincing each other to part away with cash. It could be for compassionate reasons or new businesses, in fact reasons abound and I need to enumerate further.
2. Do Not Go Into Partnership – It is not unexpected that you receive a flurry of request for partnership for new businesses when you receive a windfall. Even if they don’t approach you, it is typical that you do the approaching. Suddenly you feel like you have arrived and now ready to conquer…right? Wrong!! Partnerships hardly work and as a friend explains, it is the only Ship that hardly sails. Now is not the time to go into Partnerships.
3. Ignore pressures to donate to churches etc – A recently sacked employee told me he planned to donate 10% of his disengagement benefits to his local Church. Well while that is a beautiful thought I actually think it is the wrong thing to do. The Church is there to help you at this moment and not take from you considering you face an uncertain future. Ironically the Federal Government does not tax any income derived from compensation for loss of office because they know finding a new source of income in Nigeria can be hard. You can continue to give you offering in your religious organisation but please no more than that.

4. Emergency Fund – Put aside between 3months to 6months of your monthly salary depending on how much your pay off is. If it is more than twice your annual salary then put away your Full Year salary. If it is less than that but more than your annual salary then put aside your six months salary.

Reason By putting aside about 50% of your annual salary aside you have effectively kept 50% of your severance away. If you choose to put aside your three months salary then you have effectively saved 25% of your severance. The decision whether to put aside three months to six months of your salary away will depend on how quickly you believe you can get another job. If it will take you a bit more time then I suggest you keep aside 6months salary. That way you are sure of paying your bills and putting food on the table while you search for a regular source of income.
Note: Your emergency fund should remain the same even after you get a job. Make it a habit.
5. Put some money away in your Pension Fund account –  Now you have between 75% to 50% of your pay off left assuming you have no debt. For ease of understanding I will proceed with 50% for the rest of the article. The next thing you do is to add another 10% of your pay off to a Pension Fund that you have always contributed to. Employees in Nigeria are expected to contribute 7.5% of your Basic Housing and Salary in a Pension fund. The amount is also matched by your Employers.
Reason: Basic, Housing & Transport Allowance typically make up 60% of Staff Salaries in Nigeria. Since employees and employers contribute 7.5% each (that is 15% in total) Pension contribution is therefore about 9% of your salary every month or per annum. Therefore by keeping aside 10% of your Annual Salary you have at least saved your full years pension contribution (yours plus that contributed by your former employer).
Note: Contribute 10% of your annual salary if your pay off is at least up to your Annual Salary. If it is less then you keep aside between 1% to 5% depending on how much you have received. For people who are over 50 and above or have attained retirement age statutorily or by choice you need to put this money aside because you will already be entitled to some of your pension contributions.
6. Pay your debt –  Debts are bad and could be a clog in the wheel of progress. You should make efforts here to pay off debts. If you cannot pay off  all of it immediately make sure you at least completely pay off all of the portion that is your outstanding bills if any.
7. Save & Invest – You are not left with about 40% of your pay off assuming you have no debt. – A lot of people typically want to start out their own business once they have received huge pay offs. That is understandable and I reckon with that. However, people often forget the risk involved and don’t even bother to carry out proper feasibility on the business. As a rule of thumb I typically suggest to the following;
  • Government Securities – Invest the balance 40% of the money in Treasury Bills or FGN Bonds. These money instruments pay a handsome 9-12% interest per annum and are above inflation. They are also very safe ( 99% by my estimate) and backed by the full weight and integrity of the government. The fact that Banks, Pension funds and others that we consider investment gurus prefer them to even stock is quite compelling and helps buttresses the argument. It makes no sense trying to outsmart the market or pretending to be an investment guru. I agree the stock market returns even better yields but these are not stable. The stock market is like a pendulum, a casino only meant for savvy people. In a perfect world I would advise investing in mutual funds but that too is not as safe as FGN Bonds or Treasury Bills. The catch here is this. NEVER GIVE YOUR PAYOFFS TO PEOPLE WHO DON’T GIE 99% GUARANTY YOUR MONEY WILL RETURN AS IS. You can invest in stocks, mutual funds, fixed deposits with any other source of income.
  • Real Estate – Invest in Income Yielding Real Estate – If the balance 40% is huge enough to buy you a real estate property without needing to borrow then I will suggest you buy it provided it is one that earns you rental income. I had a friend who once spent N15million out of a N50million windfall he received building a mansion in his village. When he went broke the mansion ended up the most difficult thing to sell. No one was interested in buying it even for N1million.
  • Yourself – It is also good to invest in your dreams and desires provided you have the courage and thoroughly conducted a proper feasibility survey. I typically advice that you do not spend more than 20% of whatever is left to start a business. If the business cost more, then you are probably not ready for it in terms of funding. You should concentrate more on getting your funding in place rather than starting out a business without the necessary funding required to start. The 20% should be enough for you to at least start without borrowing from anyone.

8. Look for a Job – For those who are not looking to start a business anytime soon now is no time to rest. Be aggressive and look for a job as quickly as you can. This is also no time to be selective. Take the job that fits your minimum requirement and move on. You will need that extra income soon enough.

The above tips may not look ambitious on paper and in fact requires a whole lot of discipline. However, it provides you a soft landing in the event of any other eventuality. Think of it as that huge pile of mattresses giving you protection when you fall of a cliff.

The post above and its ensuing comments, if any, is purely the opinion of the writer(s). It therefore should never be considered as an investment advise of any sort. If required, readers should please consult a competent professional financial adviser for any investment decision.


February 2016
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