Receiving a severance payment is, at the same time, bad news (you've lost your job) and a one-off financial opportunity (you have a sum of money you wouldn't normally have all at once). How you manage that money in the first few weeks can make a real difference to your financial situation over the following months.
First things first: understand what you've received
Severance pay and the dismissal indemnity aren't exactly the same thing. Severance pay includes outstanding items (pay for days worked, unused vacation days, prorated bonus payments) plus, if applicable, the dismissal indemnity. It's important to identify which part of the amount received is actually the indemnity, because it has different tax treatment: the minimum legal indemnity for unfair dismissal is exempt from income tax up to the legal limit, while the rest of the severance items are taxed as ordinary employment income.
Priority 1: the emergency fund
Before thinking about investing or non-essential spending, the financial priority after a layoff is to secure a cushion that covers your basic expenses for as long as it takes you to find a new job. The general recommendation is to have the equivalent of 3-6 months of fixed expenses in a highly liquid product (a checking account or a high-yield savings account), not in products that penalize early withdrawal.
Priority 2: high-interest debt
If you have outstanding debt with high interest rates (revolving credit cards, consumer loans with a high APR), paying it off tends to be more profitable than any conservative savings or investment alternative, because it's equivalent to earning a guaranteed return equal to the interest you stop paying.
What to do with what's left over
Once the emergency fund and priority debts are covered, the rest of the money can be allocated based on your time horizon and risk tolerance:
- If you'll need the money in the short term (less than 2-3 years), prioritize low-risk, highly liquid products, even if the return is modest.
- If you have a longer horizon and some risk tolerance, it may make sense to put part of it toward investing, taking advantage of compound interest over the years.
The most common mistake: spending it like extra income
It's common to mentally treat a severance payment as "found money" and spend it on things you wouldn't have with your ordinary salary. The problem is that, unlike extra income on top of a stable salary, the severance payment arrives precisely at a moment of uncertainty about your future income, which makes it the worst possible time to relax your spending discipline.
Simulate how it would grow if you save it
If you decide to put part of your severance payment toward medium- or long-term savings, our compound interest calculator lets you simulate how that capital would grow across different terms and with additional monthly contributions.