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 packages 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.
Do not tell anyone
This is the hardest of all the rules and I doubt if anyone ever keeps it. However, the lesson here is that the less number of people you tell, the easier it is for you to achieve the goals I will list below. Human beings have ways of convincing one another to part with cash. It could be for compassionate reasons or new business ventures; in fact, reasons abound and I need not enumerate further.
Do not go into partnerships
It is not unexpected that you receive a flurry of requests for partnerships into new businesses when you receive a windfall. Even if they don’t approach you, you could be tempted to do the approaching. Suddenly you feel like you have arrived and are now ready to conquer. Partnerships hardly work and as a friend explained, it is the only ship that hardly sails. Now is not the time to go into partnerships.
Ignore pressure to donate to churches etc
A recently sacked employee told me that he planned to donate 10% of his disengagement benefits to his local church. Well, while this is a beautiful thought, I think it is the wrong thing to do. The church is there to help you at this moment and not take from you, considering that you face an uncertain future. You can continue to give your offerings but please, no more than that.
Have emergency funds
Put aside an equivalent of your most recent 3- 6 months’ salary, depending on how much your pay-off is. If it is more than twice your annual salary, then put away your most recent 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 away a significant portion of your severance pay, you are sure of paying your important bills and putting food on the table while you search for a regular source of income.
Note: Your emergency funds should remain the same even after you get a job. Make it a habit.
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 assume that 50% is what is left. The next thing you should do is add another 10% of your pay-off to a pension fund account that you have always contributed to. Employees in Nigeria are expected to contribute 7.5% of their Basic, Housing and Salary in a pension fund. The amount is also matched by their employers.
Reason: Basic, Housing & Transport allowances typically make up 60% of staff salaries in Nigeria. Since employees and employers contribute 8% and 10% respectively (that is 18% in total) pension contribution is therefore about 10% of your salary every month or per annum. So, by keeping aside 10% of your annual salary, you have at least saved your full year’s 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 keep aside 1% – 5%, depending on how much you have received. For people who are over 50 or have attained retirement age statutorily or by choice, you do not need to put this money aside because you will already be entitled to some of your pension contributions.
Pay your debt
Debts are bad and could be a clog in the wheel of progress. You should make efforts here to pay off lingering debts. If you cannot pay all your debts, then make sure you pay off debts that might stop you from getting services you can’t do without or those that come with severe penalties or cost.
Save and invest
You are now left with about 40% of your severance, assuming you have no debt. It is likely that at this point, starting out a business might seem enticing. That is understandable. However, people often forget the risks involved and don’t even bother to carry out proper feasibility studies on the business. Make sure you learn how feasible a potential business is by understanding the risks in it, the value chain, market, challenges, competition, etc. If you feel business is not the way, then you can consider investing. However, avoid Ponzi schemes, as they can be highly risky.
Government securities: Invest the balance 40% of the money in Treasury Bills or FGN Bonds. These money instruments pay a handsome 12 –14% interest per annum. They are also very safe and guaranteed by the government. The fact that banks, pension funds and others that we consider investment gurus prefer them to even stock helps buttress the argument.
NEVER GIVE YOUR PAY-OFFS TO PEOPLE WHO DON’T GIVE YOU 99% GUARANTY THAT YOUR MONEY WILL RETURN AS IS. You can invest in stocks, mutual funds, fixed deposits with any other source of income.
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 N15 million out of a N50 million windfall he received building a mansion in his village. When he went broke, the mansion ended up being the most difficult thing to sell. No one was interested in buying it even for N1million.
Invest in yourself: It is also good to invest in your dreams and desires, provided you have the courage and have thoroughly conducted a proper feasibility survey. I would suggest that you do not spend more than 20% of whatever is left to start a business. If the business costs 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. The 20% should be enough for you to at least start without borrowing from anyone.
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.
This article was first published on Nairametrics on December 21, 2016.
Gained. I have saved a copy on my computer. I have to read it again, religiously. Thanks for sharing these tips.
Every employee MUST expect the unexpected and plan towards it.
I just read this and it is so apt. Most of this I did when I lost my job. I still have more than 90% of the pay-off invested in treasury bills. The other 10% kept me liquid until I secured another job. Good write up.
Very educative, keep writing