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How to Create a Financial Strategy To Prepare for the Loss of a Job

If you're one of those who's recently started to check out the employment Web sites as layoffs and failed ventures spread among European companies, then you're probably also thinking about adapting your financial strategy to leaner times.

But take heart. If the axe should fall it doesn't necessarily mean disaster for your finances. Preparation ahead of a possible job loss, restructuring of your portfolio if it happens and using any lump sums to your long-term advantage are all smart strategies. Severance pay might even allow you to follow your dreams of travel or starting up a business.

A change of job can also be a good time to rethink your long-term financial goals that could pay dividends later. "Redundancy is a life-changing event," says James Davies, financial planner at Barclays Premier. "You can use it to review your whole financial position."

Be Prepared

First, the basics. The golden rule for healthy finances is to be prepared for a possible layoff. That means having enough cash to cushion your job search. Aim for between three and six months' normal living expenses that you can keep in something like a money-market fund, says Jack Brod, head of advisory services at mutual-fund provider Vanguard.

Another way to safeguard your position is to make a list of everything you might be owed and how much money you would accept if your departure is negotiable. "Often people don't do enough homework before they are told to go," says Heather Maizels member of the advisory board of Barclays Private Banking. "But you'll be in a much better negotiating position if you do."

Look at the value of your stock options and how much your pension payments are worth, Ms. Maizels suggests. And decide whether you want lump sums paid into a bank account, trust or company depending on your tax situation. Also try to stay on the best possible terms with your employer in the hope of getting a better deal, adds Ms. Maizels.

Check out other benefits that you could be owed such as bonuses or holidays. And see if you need to get additional cover, for example, for the period when you are out of work as far as life insurance goes. Confirm how long you will continue to be eligible for health-care benefits, too.

Scaling Kilimanjaro

If you get a good severance package, being laid off can become a bonus. Take Trevor Taylor, a 41-year-old former software developer. Engineering group GKN PLC let him go in August 1999 with around 35,000 pounds for his 10 years' service. He used that money to cycle across America, around Cuba, New Zealand, Ethiopia, Spain and across the Himalayas. He's also scaled Kilimanjaro.

"Now the money's gone I need to find a job," sighs Mr. Taylor, fresh from crossing the Tay Bridge on his latest cycle tour around the U.K.

Since he needed continuous access to his funds, Mr. Taylor put his severance pay into a high-interest account managed by U.K. building society Cheltenham & Gloucester that he can access by telephone. "Because there is little administration the account pays higher interest than my bank," he says. He didn't want to risk the money by investing it. So far, he's managed to resist breaking into the two tax-free savings funds he owns, the Fidelity Wealth Builder and the Scottish Widows European Growth Fund. "I've been tempted to take some money out but I want to leave it in the funds for long-term growth," he says.

Very wise. You should avoid cashing in long-term savings if at all possible, say the experts. "The cost of tapping into retirement assets can far exceed the cost of borrowing," says Mr. Brod, who estimates that around 68% of individuals in the U.S. cash out of their 401(k) retirement plans when they change jobs. "That can be devastating in terms of their retirement planning," he says.

If you find you're running out of money it might be better to borrow against your home or liquidate short-term investments such as bond funds, Mr. Brod says.

If you do have to dip into long-term savings, watch out for front-end loads that you have already paid. Many mutual funds and personal pension plans, for example, levy hefty charges up front. If you exit early you could end up losing out. "These are the schemes you should touch last," says Mr. Davies.

If life on the open road lacks appeal, a less glamorous but practical use for severance money is too pay off the borrowing on your home, says Mark Dampier, head of research at independent financial adviser Hargreaves Lansdown. This is debt that might not be tax efficient, he says, and so should be eliminated as soon as possible.

Long-Term Options

Another option is to invest the money in mutual funds for long-term growth. He recommends putting the bulk of the money into core funds such as the Foreign & Colonial Investment Trust for its track record and diversification and the HSBC Growth and Income Fund which, he adds, is also relatively low-risk.

Another practical way to put your severance pay to work is to set up your own business. That's what Thomas Reitstetter, former chief investment officer of Internet incubator Ezook, did. Having worked at Ezook for just one year Mr. Reitstetter found himself out of a job, a victim of the dot-com collapse. "I was left with three months' salary," he says. "All my stock options were useless." Mr. Reitstetter, 30, and one of the founders of AOL in Europe, used that money to gain thinking time. "I locked myself in my study for three months and came up with a business plan," he says. He started up CTO-Web, a company that advises on investment in technology groups. He has kept costs down to a minimum, though. "I'm operating what is basically a virtual company," he says. "We have a very low cost base."

In terms of his finances, Mr. Reitstetter's now earning much less than before. That means delaying projects such as the planned loft conversion on the home he shares with his wife and two small children. "I can't get a mortgage because the company hasn't been trading for three years," he says.

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