Almost 3 in 4 Laid-Off Americans Are Using Severance Pay for Holiday Gifts. Here's Why That Could Be a Huge Mistake

It's a move you might sorely regret.

These days, the U.S. labor market is in pretty good shape. Unemployment is low on a national level, and many companies are still hiring.

But that doesn't mean some people aren't closing out 2022 with a pink slip in hand. In recent weeks, a number of large tech companies have implemented layoffs. And some companies may have downsized their staff due to recession fears.

Of course, getting laid off isn't exactly the best way to kick off the holidays. And if you recently lost a job, you may be doing your best to put on a happy face and push negative thoughts aside to celebrate the holidays in full.

You may also be inclined to use some of your severance pay to purchase holiday gifts. But that's a mistake you might regret.

It's time to conserve funds

Some people who get laid off are entitled to severance pay. And the amount of that can vary from one employer to another. It can also vary based on the number of years you spent working for your employer.

A recent survey by Yellow Octopus found that almost three out of four recently laid-off U.S. workers are using their severance pay to buy gifts this holiday season. And you may be inclined to do the same. But before you do, you'll need to make sure that's something you can truly afford to do.

If you don't have a lot of money in your savings account, then you might really need your severance pay to cover your essential living costs while you look for work. And so if, for example, you received a lump sum of $5,000 in severance, and you normally spend $2,500 a month on living costs, you should probably hold off on using that cash to purchase gifts if your savings account is empty.

On the other hand, let's say you have a decent-sized emergency fund to fall back on, and you happened to receive a severance package that includes compensation for six months of wages. That's pretty generous. If that's your situation, then sure -- go ahead and spend a few hundred dollars on the last-minute holiday gifts you need to buy. But otherwise, be really careful with severance pay so you don't wind up falling behind on bills in the coming months.

Other ways to celebrate

It's easy to see why you may be inclined to use severance funds for holiday gift purposes -- you don't want to disappoint the important people in your life. But think about it this way: Would you rather give your kids fewer holiday gifts and keep the lights on this winter? Chances are, that's an easy decision. So instead of splurging on gifts, find a family movie to watch, get into cozy pajamas, and establish new traditions that are more budget-friendly.

Ideally, you'll be able to find yourself a new job once 2023 kicks off and hiring is back in full swing. But until you're gainfully employed again, be very careful with how you spend your money -- and resist the urge to go all out at the last minute for the holidays when you might need your limited funds to put food on the table and pay your rent or mortgage.