Being made redundant can turn your world upside down in a heartbeat. It makes you question your financial security, your lifestyle and your future all at once and probably to a much greater extent when you’ve got loved ones who depend on you. To compensate you for throwing your life into disarray, your employer may have paid you a redundancy or termination payment.
So what do you do? Your regular income will disappear (if it hasn’t already) and you’ve received a large one-off lump sum payment – probably accompanied by a piece of paper with confusing tax jargon all over it. But even before considering the tax implications, you’re probably wondering what to do with these funds.
Some people might go on holidays, buy a new car, or even (sensibly) pay down some debt. All those things are great and depending on your circumstances, you might have enough cash for some or all of them. But what if you don’t? What if times are tough? You owe it to yourself, or at least to your family to have a plan.
One size doesn’t fit all when it comes to personal finances. Still, you need to ask yourself some tough questions, and you’ll need to answer them as honestly as possible…
- “How long will it take to find new employment?”Or in other words, “For how long might I have to stretch my redundancy money for before regular income starts coming in again?” This rests heavily on how much demand there is for your skill or trade. Either way, it would be wise to update your resume, speak with an employment agency, or perhaps even learn a new skill.
- “What are my weekly living expenses?”Living expenses generally include goods, services, or other amenities you either cannot do without and/or contribute toward basic living standards. It could also include things like health insurance, kids school fees and other services that people would be hesitant to cancel. If you’re looking to reduce expenditure, it’s preferable to reduce expenditure in other areas before looking at these expenses.
- “What are my discretionary expenses?”
Or in other words, “What expenses could I postpone or stop altogether if I had to make ends meet?” It might be that new TV you had your eye on, a holiday, or that kitchen renovation you were planning. Those are fairly big ticket items but consider the little things too. You might decide that you can do without Foxtel, or you could eat less takeaway, or you no longer need certain luxury items.
- “What are my debt repayments?”
It certainly is tempting to use your redundancy money to pay a big chunk off the mortgage. If you’re in a position to do so, then great! But if you need that money to live off temporarily, then it might be wise to stick to minimum repayments. Speaking of debts, use your credit card wisely. Now might not be the best time to ring up huge credit card bills, and when you do get a bill try to pay it in full on time.
- “What sort of income can I expect when I do find work?”Whether in the same line of work or otherwise, it may be the case that your new job doesn’t pay as well as your old one. This question is a critical one because it addresses your financial capacity over the long term unlike the previous questions which only focus on making it through the short term.
Tackling these questions and setting a budget may impact your lifestyle. It’s not an easy situation, but I believe the goal is to ride out the tough times until you find employment without sacrificing what really matters; your health, your family and your peace of mind.
The Tax implications of receiving a redundancy are, in my opinion, secondary issues to those above. Just remember, your redundancy payment will only be eligible for concessional tax treatment if it is a genuine redundancy. “Golden handshakes”, gratuities and payments for unused leave do not qualify.
Optima partners can offer further advice tailored to your specific needs.