Step 1: calculate your runway
Runway is the number of months your available cash will last at your current spending rate. The formula is simple: total available cash divided by monthly outgoings. Total available cash includes your final pay (net of any tax already applied), any savings you can reasonably draw on, and any benefits you’re newly entitled to. Monthly outgoings is whatever you’re actually spending now.
Example: final pay of £18,000 (net), £5,000 of savings, no benefits yet, monthly outgoings of £2,800. Runway is roughly £23,000 ÷ £2,800 = 8.2 months. That’s a healthy starting position. Many people in the same package can extend it to 10-12 months with relatively easy adjustments.
Step 2: audit the fixed costs
Fixed costs are the recurring debits you’ve stopped noticing. Subscriptions are the obvious ones: streaming services, news subscriptions, software, music, gaming, fitness apps. The first hour you spend cancelling unused services typically saves £40-£100 per month. The second hour, maybe another £20-£40. The third hour usually saves relatively little, so don’t over-optimise.
Less obvious fixed costs include mobile contracts (often rolling on the original deal at a much higher rate than a fresh SIM), broadband (most providers will renegotiate if you threaten to leave), energy (compare tariffs annually as the market shifts), and insurance (renewal letters often quote significantly higher prices than the same insurer will accept from a new customer).
Step 3: decide on the emergency-fund target
The standard advice (3-6 months of essential spending in cash) was written for people in steady employment. Once you’re using the lump sum to live on, the question changes. The new question is: how long does this money realistically need to last, given how long you think your job search will take?
For most office workers, 3 months of runway covers a normal job search; 6 months gives breathing room to be selective; 9 months covers a sector switch or retraining. Decide on the target now and let it shape everything else. If you need 6 months and you currently have 4, you know you need to cut spending or accelerate income. If you have 8 months for a 3-month search, you can be more relaxed about non-essential spending.
Step 4: separate the money
Keep the bulk of your lump sum in a high-interest easy-access account, not in your current account. The difference between a 0% current account and a 4-5% savings account is real money: £30-£50 per month on a £10,000 balance. Choose an easy-access account so you can move money back without penalty.
Set up a monthly transfer from the savings account to your current account, replacing what would have been your salary. Choose an amount roughly equal to your essential spending. This creates the same psychological pattern as a normal monthly income, which makes day-to-day spending decisions easier and reduces the temptation to dip into the lump sum for non-essentials.
Step 5: think about tax and benefits
Check whether your tax position is correct. The redundancy pay packet often pushes a slice of income into a higher tax band for the month it’s paid. Over the full tax year this usually reconciles via your tax code or a self-assessment refund, but it’s worth checking that you haven’t been over- or under-taxed. The HMRC personal tax account shows the picture.
Benefits worth checking: New Style Jobseeker’s Allowance (based on your NI contributions, not means-tested, payable for up to 6 months); Universal Credit (means-tested, household-level); Council Tax Reduction (apply through your local council); free prescriptions / NHS dental help if your income drops below the threshold. The gov.uk benefits calculator gives a rough indication.
Step 6: avoid the common mistakes
The mistakes that recur in the first month: cashing out a pension early (the tax is punitive and you lose decades of growth), making expensive lifestyle commitments (a new car, a house move, a costly holiday) before income is clear, ignoring the benefits you’re entitled to, taking the first job offer at week 3 because of money panic, and continuing to spend at the pre-redundancy rate “just for a couple of months” until the lump sum is half gone.
None of these is fatal but each costs more than it needs to. A monthly budget review (15 minutes, once a month) is usually enough to keep things on track. If a single month looks wrong, you can adjust the next.
Related
- Surviving redundancy financially: the 90-day guide
- Emergency fund after leaving work
- Cutting monthly costs after redundancy
- Redundancy pay tax explained
- Redundancy pay calculator
- Final pay after redundancy
Frequently asked questions
- How do I budget after redundancy?
- Start with the runway: divide your total available cash (final pay plus accessible savings) by your current monthly outgoings to see how many months you have at current spend. Then work on extending that figure by cutting fixed costs and avoiding non-essential discretionary spend until you've got a clear income picture again.
- Should I pay off debt with my redundancy money?
- Sometimes. High-interest debt (credit cards, store cards, payday lending) is almost always worth clearing because the interest is more than you'd earn anywhere else. Lower-interest debt (mortgages, student loans) is usually not worth accelerating, because your redundancy money has more value as runway than as a small interest saving.
- How long should I make my redundancy money last?
- Aim for 3-6 months of runway minimum, longer if you can. Three months covers most office-role job searches; six months gives you the space to pick a good fit rather than the first offer. If your sector is contracting or you're considering retraining, 9-12 months is a more realistic target.
- Can I get help with budgeting after redundancy?
- Yes. Free options include Citizens Advice, StepChange (for debt-related advice), and MoneyHelper (the government's free money guidance service). Spending-tracker apps help you see the picture; free budgeting tools include Emma App, Money Dashboard, and Snoop, among others.
General information about budgeting, not financial advice. For tailored advice, contact MoneyHelper or a regulated financial adviser.
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