What To Do With A Severance Package Or Financial Windfall

Rio De Janeiro Sunset Over The FlavelasCongratulations for receiving or negotiating a severance package or financial windfall! Severances are not mandatory in many countries, therefore anything you get beyond $0 is a bonus. Hopefully you've used the strategies I've outlined in my book to get the best severance package possible.

It's not just the financial windfall that's so great, it's the fact that people feel empowered to finally take control of their lives. From the working mother who gets to spend more time with her kids, to the guy who absolutely can't stand his micromanaging boss, each story is different.

I'd like to discuss ideas for how to spend your severance wisely. This post is pertinent to anybody who has or will receive a financial windfall e.g. inheritance, lottery, legal win, bonus, severance, etc. I'm going to also share with you what I did with my severance and the thought process behind each decision. By the end of the article, you should have a better idea of how to mobilize your money.


1) Do nothing. The number one recommendation I can give for anybody who comes into a lump some of money is to do absolutely nothing for the first month. Once that month is over, shoot for two full months of doing nothing. Money makes people do foolish things, especially those who've never had a lot of money to begin with. You might be tempted to buy a vacation property in a destination you hardly visit or buy a new car when you're existing one works just fine. You might start thinking you're Warren Buffet and invest in “sure things.” Give yourself as much time as possible to let your windfall sink in. Go about spending and saving like you've always been doing. Do not to let new money change you.

What I did: After receiving a lump sum severance check after my three month WARN Act pay was over, I took my friends out to dinner and celebrated! I was very tempted to finally buy a new used car to replace 12 year old Moose, but reminded myself that Moose worked fine. The money sat in my pitiful 0.1% money market savings account for two full months before I decided to invest a big slug of it in a Dow Jones structured note which provided 100% downside protection and 115% participation to the upside over six years last summer.

2) Assess your financial situation. During your one month plus long of doing nothing with your money, you should create a spreadsheet and list all your spending. See where you can cut as well as include surprise expenses in your budget. Also spend time calculating your passive and alternative active income streams. Once you've calculated your monthly and annual expenditure figures, you should compare these figures against your financial windfall. How many months can you live just off your severance alone? If your financial windfall is sufficiently large ($100,000+), consider hiring a fee-only financial advisor to help you set up a framework to make your money last.

What I did: I've had a running budget for the past 13 years since college. Living in Manhattan on $40,000 a year my first year out of school was difficult! Hello roomie in a studio. After rechecking my monthly and annual expenditures, I calculated my severance package would realistically cover roughly six years of living expenses. I then made some expenditure adjustments for “living it up” and “living it down” to come up with a range of 4-8 years worth of living expenses. I tallied up my various passive income streams, which will be earmarked as 100% savings as I try and live off my online endeavors.

3) Decide which path to take. Before engineering your layoff, inheriting money, or coming to a settlement, you should already have been mentally planning for your future. Scenario analysis is key. Now that you know the outcome (the amount of your windfall), it's time to make decisions on what's next. Do you want to look for a new job in a new industry? Do you plan to start a new business? Are you going to travel the world? Have you always wanted to be a Whale and put $100,000 on black? Don't do that. Your severance package gives you a runway to plan. When it comes to financial freedom, planning is tantamount. The best case is where you can double or triple your income for a period of time.

What I did: With six years worth of extra living expenses, I knew there would be temptation to just slack off. To get slacking off out of my system, I took a three week trip to Europe and went to Hawaii three times in six months to surf and play golf. Once I was back to normal, I decided to give myself one full year of full-time entrepreneurship before making a decision on what's next. By June 2013, I will have either reached my one year financial goals with entrepreneurship, or I will have failed. If I fail, I will then strongly consider finding a new job in a new field to keep my enthusiasm at its highest. Worst case is that my online endeavors will be better than if I had never given my full attention.

4) Make your money disappear. There will always be the temptation to spend our money if it's readily accessible. Therefore, consider protecting yourself from yourself by spreading your money in investments based on your own risk tolerance. Consider giving some of the money to your parents who've spent all these years taking care of you and asking so little in return. Lock your money up in a CD or park your money in an online savings account.

What I did: Within six months, I made 100% of my severance package disappear. Part of it was sent to a 1% yielding online savings account, which blows doors off the average money market rate of 0.1%-0.2%. A good chunk of it was locked up in a six year structured note. A little was sent to my parents for some home maintenance projects. While the rest of it was used to pay some principal off my highest interest rate rental property mortgage. In other words, I spent nothing directly on myself! But, that's OK because it gives me great pleasure knowing that my money strength is improving. I feel stupid spending money on things I don't need. Perhaps if I was still 28, I would have used some of the money to buy a 2013 Range Rover SuperCharger, but I'm over it already.

5) Expect the unexpected. If you do not have any recurring passive income or existing liquid savings, keep at least six months worth of living expenses handy. Good and bad things happen all the time. It can easily take longer than six months to find your ideal job and your business can easily fail. On the other hand, fear is a powerful motivator. When you have no financial security net, no big government, no bank of mom and dad, you do everything in your power to create income to survive.

What I'm doing: Although I hope for the best everyday, I expect the worst. There will be times in my entrepreneurial endeavors where hardly enough comes in to pay for food. No matter. A great way to lose some weight! There are monthly Google algorithm updates which could theoretically wipe out 70-80% of this site's entire traffic. My server could implode, Amazon could lose my backup data, who knows! As a result, I'm diversifying my traffic sources and online income streams as methodically fast as I can so that if one piston breaks, I've got multi pistons remaining to drive this Pinto.

6) Start your own business. Getting laid off with a severance might just be the catalyst to finally start that business you've always wanted to start. The best business is an online business because it's easy to set up, easy to maintain, and hugely scaleable with 3 billion+ people online. Start one with Bluehost for less than $4/month and you get a free domain name for a year. Once you establish a platform online, you'll be amazed at how many opportunities come to you.

What I'm doing: I'm actively growing Financial Samurai since I first started it as a personal journal in 2009. The site now makes more than my day job as an Executive Director in Finance while working 80% less and being 100% more free. I truly believe the blogging business is the most fun and rewarding business in the world. Learn how to start one yourself in 30 minutes with my step-by-step tutorial guide

Pro Blogging Income Statement
Having a website can provide you the freedom and flexibility you desire.


If you live in the developed world, you've got a plethora of opportunities thanks to the Internet, a solid legal system, and good public infrastructure. If you live in a developing world, then change can bring about tremendous upside by nature of where you lie in the pyramid.

In America, big government has ironically provided us more opportunity to take risks. The trick is to not get lulled into complacency by big safety nets. Use the safety net to invent your great flying machine and jump off a cliff instead!

Never get, get laid off folks. Check out my book: How To Engineer Your Layoff: Make A Small Fortune By Saying Goodbye to learn how to negotiate a severance. I negotiated five years worth of living expenses when I left in 2012 and it's been the best thing ever. The book has now been expanded to 180 pages in its third edition thanks to terrific reader feedback and successful case studies.

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Photo: Sunset Over Ipanema Beach, Rio. 2020. 

40 thoughts on “What To Do With A Severance Package Or Financial Windfall”

  1. Lisa Brown, Canada

    The spending cuts are needed either way. It is the next 2 or 3 generations that will be paying for this present one for the debts already incurred by the government. At some point they have to face the facts, the government has become to overstaffed, grown to big, and has been overspending for to long at the expense of the taxpayers.

  2. At the end of last year, the private equity firm that held majority stake in one of my former employers offered buyouts of private shareholders. I walked away with around a 450% return after about 5 years. Where did that money go? After setting aside a portion for LTCG taxes, I paid off anything that wasn’t fixed-rate, and anything that was carrying a higher rate than my mortgage. Maybe not the best move given the startlingly good returns in the market YTD, but it was an incredible upgrade in peace of mind, and I’ve improved our household’s monthly cash flows by nearly $1000.

  3. Great post. I am about to receive a decent sized severance package from my 9-5 as the company is being sold. I’ve been confused as to what to do with it; I’m disciplined enough not to use it for frivolous things, but I’m not so sure how it should be used. Your advice has given me much to think about, thanks!

  4. Depending on your history with money a windfall could make you either freeze or take the plunge. One of the best ways to test your resolve is; take any money you get outside your normal income and put it in a fixed term deposit for a minimum of 1 year. Most people are surprised at how quickly they forget they even have it until the interest statement arrives.

  5. Sam,

    OT- but now that Apple is down to $485 per share, are you a buyer (as you said you’d be at these levels before)?


    1. I am a buyer at $485. I’ve got a structured note that provides a 20% downside buffer from where I purchased at $519 i.e. $412. If Apple is above $412 by June 20, 2013 (6 month note) I make 3.5% (7% annualized) on my money.

  6. I love the make it disappear point. I just made $60K disappear and it was weird to see that amount gone in three transfers but an awesome booster to keep looking for ways to make extra money instead of sitting comfortably on that cushion for months.

  7. Will french

    I recently received some windfall and I’m using it to pay down my mortgage early, shaving years (and thousands) off of repaying this mortgage. Getting out of all debt (mortgage is the last thing) is my goal!!!

  8. Like your belief that our weight is our fault and not due to genetics, our finances perhaps are also our fault then? With a $2,000 windfall, id use 100% to pay off your student loans.

  9. Directions for windfall: use 100% to pay off debt, after no debt including your home then sacrifice and save like a crazy person for years building your nut to the point you can say the hell with it if anything happens. Never, ever again buy anything you don’t pay cash for, have a credit score of zero because you don’t borrow money. Once you are there, enjoy the hell out life and don’t get caught up in trying to grow your number in your bank account…grow the photo album with experiences and memories of family/friends! If you sacrifice up front, life gets alot easier and more fun down the road.

  10. Very interesting Shilpan! I’ll have to double check and inquire! Makes sense not to tax FICA from severance if one is no longer working…. but, I guess it can be view both ways.

  11. With a windfall, I would remember expect the unexpected…and aside from that, I would NOT go out and treat myself to anything. Really. The best treat would be financial freedom, which money can buy to some degree, as long it’s not spent ahead of time.

  12. The First Million is the Hardest

    I think you read my mind with this post. I’ve got a little windfall coming my way later on this year from a family member. Luckily it’s coming in the form of shares of stock so I don’t need to worry too much about the temptation of blowing it on all the shiny things I crave.

  13. Kim@Eyesonthedollar

    How right you are that most people would go out spending, ending up broke in 6 months. I think it would be harder if you were poor your entire life and got a huge settlement or won the lottery. It would be tempting to go buy a new Escalade. Just curious, do they withhold taxes from severance or is that on you?

    1. They withheld taxes for mine. It depends on the size of your severance. 25% withholding is general standard, but can go to 35% if you get over $1 mil. IRS thinks your lump sum is your new recurring salary for 12 months and wants their cut.

  14. hey, are you implying that a 28 yr old wouldn’t have made a smart money choice? Four months ago I was still 28 yr, but the only range rover I saw was at the dealership not in my garage. In due time, I will get me a used land rover freelander (it’s my dream vehicle, dont judge) but for now, I like seeing my money grow! It’s like I’m addicted to compound interest.

    1. Great you are addicted to compound interest and growth! I was the same way for most of my career but did splurge on vehicles and international trips every year.

      You should get the classic LR Defender! Those are pretty sweet but are hard to come by.

  15. I’ve had a few windfalls in my life- mostly related to severance or a bonus related to a company sale. For the latter I basically banked all the money, and then took a trip to the Maldives with the wife 5 months later that cost several thousand dollars. It was an unexpected splurge and one that was totally worth it.


      1. Well you have to get to Singapore first and then it is a 3 hour flight to the capital, Male.

        Or you can go through Europe.

        Then it is a morning seaplane to the your resort / island. One resort per island.

        We had an all inclusive package that was about $1000 per night including Seaplane transfers… can’t fully remember but it was super incredible. From the deck to the vast coral reef is just a dozen steps away. Great food and drink while seeing some pristine marine life- couldn’t be beat!

        Give it a go- I’d like to see your photos and write up…


        1. Sounds wonderful. Lucky for those who live in Singapore. Everything vacation-wise in Asia from even SF is so far. Thinking of Bali.. but that is going to take 20-24 hours… ugh.

        2. Do it as part of your trip to Thailand – Singapore – Vietnam… maybe you can swing it in 2013?

          Having made the trip over, you might as well explore the region for a little bit.

  16. My financial windfall was an inheritance! I immediately invested the first one and it paid off handsomely. The second one was with my children as partners and I waited a while. I invested it in real estate in San Francisco. I expect it will do as well or better. I have and would treat any windfall the same way, I would invest it.

    There are lots of stories of entertainers or pro athletes blowing millions. They spend it on things that immediately are worth less. I would not deprive myself, but I do not need to spend my entire check/bonus/windfall!

      1. I am working on it! This year I committed to going away for at least 2-3 weekends in addition to any vacations. Probably next year, I will replace my wife’s 1997 Honda Prelude! I know it is not much, but I a trying to overcome 6 decades of thriftiness.

  17. I run through “scenario analysis” like this every once in a while. My wife and I are not at all likely to receive a life-changing windfall in any near-term, but it’s costs nothing to have plans! In our case, with an amount up to $100,000, we would do the same thing we do with all of our savings – wait until we find an appropriate investment (likely real estate) and plunge in. Historically we tend to invest in $25k-$40k chunks at a time, so we’ve never had a $100k cash position to work with. I’d look for a 3+ unit residential property.

    If the amount were larger, in the $150k-$200k range, we’d probably splurge on a nice trip (spending as much as $10k), and use the rest as a down payment on an investment. If the amount were in the million dollar range, we’d look at putting maybe $100k away in less risky assets (bonds or CDs, perhaps), take the nice trip, replace my car, and look at several multi-unit residential properties or even some commercial investments for cash flow. Several years down the road, when it all is cash-flowing predictably and we’ve matched our salaries with investment income, I’d start to think more seriously about getting my sailboat (off of Craigslist!).

  18. Money Beagle

    Great tips. I’ve heard the first one (do nothing for at least a month) multiple times. I think if I came into a windfall, it would depend on whether or not I was still employed as to what I’d do. If I were still employed, I would probably pay off some or all remaining debt (student loan, mortgage) as a first priority. If the full amount(s) were freed up, that would free up cash flow moving forward.

    If I was unemployed, I would be a little more protective over making sure that I still had the money available to live off if need be.

    1. It’s like a game. Do nothing and be a little giddy for one month, then go for a second month of do nothingness. There’s a chance you may won’t do anything for years, which I think is not a bad idea as it shows you are living like usual.

  19. Sam,

    Given that we are now in bonus season, I must ask about that kind of windfall. What do you suggest as an optimal allocation for your bonus money? Obviously saving 100% of it would be ideal, but I would like to treat myself a bit. I am thinking something along the lines of – 2/5 to pay down debt, 2/5 to save, and 1/5 to spend, guilt-free. What would you suggest?

    1. Howdy Brendan, it all depends what your goals are and how comfortable you are w/ debt and what type of debt you have. I guess it also depends on how big your bonus is too.

      Spending 20% to blow on whatever you desire sounds good. I personally got a thrill out of trying to save 100% of my bonus every year for years. I’d play a game to find the best vehicles to lock up my money to build my money strength.

      Only you can decide. But what I can adamantly say is to do as much as possible to build that financial NUT!

  20. Sam, I come to your site for the photos! I stay for the wisdom.

    A close family member was just offered an 18-month severance from a large Dow 30 corporation; he chose not to accept the lump sum, and instead take his chances with future layoffs. He has a family, house payment, and kids starting college. Plus, he is well aware of his contemporaries that have taken this lump sum and ‘plunge’, but have not come out the other side a few years later with an improved situation.

    For people that are single and don’t have financial obligations to others, this column makes perfect sense. Thanks for running down your process for us.

    Still working on ‘getting laid’ off. As your book aptly notes, it takes patience. I’m not in line for any sort of payout or lump sum. But! I am attempting this way out because 1) it will leave future options open for me if I don’t quit, but am ‘right-sized’; 2) 26 weeks of unemployment; 3) this may seem odd, but I don’t want to have to explain my personal business to family and friends. It comes off as obnoxious, and the few times I have mentioned an early exit from the work force people take it as an invitation to argue or criticize (while validating their own position). Will keep you apprised. Continued success to you, as you live the dream!

    1. JC, 18-months is an impressive severance package! The issue with severance packages is that they are NOT mandated by law. A severance package is a goodwill gesture to the employee. If the Dow 30 corp so happens to stumble, they may just slash and burn their employees and provide no severance, and just the mandatory WARN Act pay.

      It’s a gamble that I hope pays off for your friend. Encourage him to work on those multiple income streams yesterday.

      Keep your personal business personal mate. No need to justify anything you do. Plan what is best for you!

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