Just as most people don't want to think about losing a job, many financial planners haven't thought much about the needs of clients whose income is reduced during unemployment. Their counsel hasn't changed in 20 years: "Three to six months' expenses in a savings or money market account ought to tide you over in the event of an emergency." But this advice won't cut it today. A three to six months' cash hoard will be stretched severely by the expenses of a job search, as well as by increased health, life and disability insurance premiums.

Under most company's policies, the number of weeks' pay offered as severance is computed on base salary alone. This figure might seem adequate at first glance. However, if you've enjoyed a lifestyle buttressed by bonuses, commissions or an override, your actual severance pay, which doesn't account for these elements, will bring you back to reality fast.

An Eight-Step Strategy

When financial planners help clients devise strategies for retirement, education funding or estate and tax planning, they employ a classic five-step process. This same process, enhanced by three additional steps, can help enormously when planning how you'll negotiate a separation package and put the resulting funds to best use. The revised process, including additional steps, would be:

1. Establish a budget of monthly expenses.

2. Define your objectives.

3. Identify your resources.

4. Quantify the gap between your resources and objectives.

5. Negotiate to close the gap.

After your initial negotiations, you should:

6. Take steps to close the post-negotiation gap.

7. Monitor your progress.

8. Go back and negotiate for more if you need it.

Step 1: Establish a budget of monthly expenses.

Your most reliable source of data will be your checkbook register. For monthly expenses, use the last three months and calculate an average. Be sure to backtrack for the full year to pick up quarterly, semiannual and annual payments, such as property taxes and insurance premiums.

The sad truth is there are few areas where you can cut back just because you're out of work (or soon will be). In fact, when you review your worksheet, you may find that certain expenses will rise, particularly if you've relied on your employer for such benefits as a car, association dues, club memberships, subscriptions and insurance coverages.

Step 2: Define your objectives.

Now that you've calculated how much you need to get by, define your objectives. This process requires some quiet, serious thought. Perhaps you were planning to retire at age 65, move to a warm climate, buy a home, travel a little, play some golf or tennis and generate about 50% of your current gross income per year in after-tax income. You would have added up your pension and retirement-plan benefits, Social Security, investments and cash resources, calculated how much more you'd need to save, and started stashing it away. But your premature unemployment forces you to contemplate a muddier picture.

The first question to ask is "How long will I be unemployed?" Or, in other words, "How long must I plan on providing a weekly income for myself?" In the past, the rule of thumb was to assume it would take one month to find a job for every $10,000 you wanted or expected to earn. Unfortunately, this rule is no longer valid.

A widely esteemed financial-planning guru once said that the only thing a financial planner can count on is that his or her assumptions will be wrong, and that the further out the plan is projected, the more wrong the numbers will be. For your plans to hit close to the mark, consider the job market as a pyramid. The lower on the pyramid you are, the greater the number of available jobs. The higher you are, the fewer the opportunities.

For every 100 telemarketers, for example, there may be only five to 10 supervisory positions, and two or three who manage those supervisors. And there's only one seat reserved for the marketing director. If that's the job you seek, it will likely take you longer to land than if you were looking for a junior-level spot.

Your best-case scenario should be to land a new position in three months, with one year being the worst case. Fortunately, because of this pyramid concept, many companies provide senior people with more generous severance packages. However, this gives them less of an incentive to find a new position quickly.

Once you've made an assumption about how long you might be unemployed, the next question to ask is "What do I want to do now?" In recent years, many laid-off white-collar employees said farewell to corporate America. They started their own businesses as consultants, service providers and manufacturers. If you've been thinking about a change, now may be the time. If you agree, decide how much capital you'll need, including money to live on for a year. Look for a full-time job only if, after a year, your business isn't moving in the direction you want. Remember, most businesses take two years to get off the ground. The same rules apply to changing careers or returning to school. Do it immediately after depositing your separation package, and don't waste time. When you're unemployed, time truly is money.

After you've made assumptions about how long you'll be unemployed, the type of job, if any, you want, and what your monthly expenses should be, it's a simple procedure to determine how much money you'll need. Take your monthly expenses, revised to reflect being unemployed, and multiply that figure by the number of months for which you want to plan. To play it really safe, add another three months as a cushion. This is the amount of money you'll need.

Step 3: Identify your resources.

Your next step is to identify the resources that will help you make ends meet while unemployed. These may be numerous or nil. Consider the following:

Cash on hand. This is cash or cash equivalents you hold in savings, checking or money-market accounts. Certificates of deposit, depending on their maturity, may also be considered as cash on hand.

Unemployment. As a rule, unless you were fired for misconduct or resigned without provocation, you'll be eligible for state unemployment benefits. Your employer neither provides unemployment benefits to you nor can your employer withhold them. Accordingly, don't become effusive if your employer tells you that you're eligible for unemployment. It's no concession from the company, so don't negotiate away something out of gratitude for it.

Unemployment can be an important source of cash. While it may not seem like much, that $200 to $300 a week can cover a monthly mortgage or car payment, with money left over for gas. Don't waste time waiting to file for unemployment benefits, because there's usually a one-week delay before the first payment.

Remember, unemployment isn't welfare. You've funded it through the taxes you paid during your work years. Most states allow claimants to file by phone, dispensing with waiting in long lines in dreary offices. The benefit duration is at least 26 weeks and, in some states, 32 to 52 weeks.

Bear in mind that the financial-planning rule, "Make money, pay taxes," applies to unemployment benefits as well. You'll have to pay taxes next April 15 on any benefits you receive now. Unless you're sure you'll have a job and the cash to pay the taxes, it's a good idea to use half to two-thirds of the unemployment check to help pay bills, and hold the rest aside in an interest-bearing account until tax time. How much you set aside depends on your tax situation -- the higher your tax bracket, the more you should withhold. When calculating your taxes, remember that if you're receiving a significant separation payment, it may raise your bracket. Under current law, this too is taxable income.

Severance pay. To determine the amount you'll receive, review the company's severance summary-plan description. Every employee is entitled to ask for and receive a copy of this plan.

Employee benefits. When calculating your available cash, don't forget employee benefits that may provide additional resources. These include incentive stock options or stock appreciation rights (ISOs and SARs), stock purchase plan shares, employee stock ownership plans (ESOPs), and so on. Investigate how and when you'll receive these benefits.

Turning the proceeds into cash can have important tax consequences. For example, one former employee's stock purchase plan allowed her to buy stock at a 15% discount off the current market value. But there was a holding period of one year for her plan. If sold sooner, the discount was treated as ordinary income instead of capital gains when the stock is sold. As the former employee liquidated her stock to meet her needs, she instructed her broker to sell the oldest shares first so that she would be taxed on the profit at 28%, the current capital-gains tax rate, versus 39.6%, the federal income tax rate she was subject to at the time.

Investments. While not cash per se, your investment portfolio can be turned into cash if necessary. As a first step, review your portfolio and determine how much income it's generating right now. Be sure the income you're counting on is reliable. If it comes from stock dividends, do some research to be sure the issuer has reliably paid the dividend throughout a full economic cycle. If it's from bonds, check the credit rating of the issuer to make sure it's investment grade.

Since your objective is to maximize your income during unemployment, consider making changes in your portfolio to make it more income-oriented. But consider the tax consequences of your investment decisions. It won't do you any good to take a $1,000 profit to create another $50 per year in annual income, since under current tax law, you might have to pay $280 in federal capital-gains taxes.

401(k) Plans/IRAs/retirement-plan monies. A first rule of advice: Don't touch this money unless you absolutely must. The second and third rules are the same. Why? It's growing tax-deferred, which makes it better than any other investments you may have. So it should always be the last thing you use. And unless you're age 59 1/2 or older, any monies you withdraw are subject to a 10% penalty tax in addition to the usual state, city and federal taxes you'll pay.

For IRA plans, there's an exception to this rule, known as "substantial equal payments," but it requires you to make roughly the same size withdrawal each year based on actuarial calculations of your life expectancy. If your financial need is great enough to use your IRA balance, it's probably going to be much more than a fraction of what you've accumulated. If you're age 59 1/2 or older, this money becomes more attractive, but it still should be the last savings you use.

Home equity. Substantial equity in your home is a source of income you may not have considered. But before applying for a home-equity loan or line of credit, consider these factors: How much equity do you have, how much will it cost to get at it and what's happening in your local real-estate market?

Try not to increase your mortgage if you can avoid it. If you bought your home for $150,000 and owe $75,000 on a $120,000 mortgage, don't borrow any more than the $45,000 you've already paid in, even if you think it's worth $200,000 in today's market. This rule doesn't apply if you bought your home in 1965 for $11,000 and today it's worth $500,000.

Another thought: It's better to assume a line of credit than to take a loan. That way, you only use and pay interest on what you need to get by, month to month. In fact, if you're still working but think your job may be in jeopardy, it's a good idea to apply for that line of credit now. Remember, banks are more disposed to extend credit to people who have jobs than those who don't.

Taxation of separation payments. Many companies will automatically tax severance payments at a 28% rate. But some don't. They'll use the rate you have on file as your usual rate, which may be considerably higher. If you want to improve your immediate cash flow, have them tax your payment at 28%. Beware, however, that in April, the tax person cometh, and you'd better be ready to pay up.

Step 4: Quantify the gap between your resources and objectives.

Add together the following information about your resources on a worksheet: the amount of cash you have on hand, your unemployment benefits, separation package, investment income or investments (one or the other, but not both), employee-benefit proceeds, retirement-plan proceeds (only if absolutely necessary) and home equity.

Take the total and divide it by the number of months you think you'll need to land a new job. This is your monthly cash in-flow figure. Next, subtract from that figure your monthly cash out-flow amount. If you come up with a negative number, you have a gap between the reality of your objectives and your available resources. If the figure is positive, you have a surplus, which should be set aside each month to help you stretch your unemployment period as long as necessary. If you have a surplus, go to Step 7. If you don't have a surplus, read on.

Step 5: Negotiate to close the gap.

You've done your homework and have the figures to back up your story. When you start negotiating, you'll be armed with knowing a target amount of money, legitimately arrived at, that you'll need to live on. Since this amount will be real to you (unlike some fantasy figure you pulled from a hat), you'll be able to tell your story with conviction. A compelling story, backed by logic and reason, usually will get you more than anything else you bring to the table, including the threat of a lawsuit.

Step 6: Take steps to close the post-negotiation gap.

If a gap still exists after you've done all you can to negotiate with your employer, consider these steps to close it. First, take another look at your budget. What can you reduce or do without? Your monthly mortgage payment might be lowered by refinancing, depending on interest rates. But be sure that the cost of refinancing doesn't eat up the monthly reduction in your payment.

If you have a second home, and there's a decent rental market, rent it. If you have any credit-card debt and you're paying interest every month, get rid of it. Use your separation pay, a home-equity loan or a line of credit to pay it off. The interest on the home-equity debt is tax-deductible; the interest on the credit card isn't. The home-equity interest rate also is likely to be half the rate of your credit card.

Step 7: Monitor your progress.

Financial planners say this is the step people always want to ignore, although it's probably the most important part. After working hard to establish a plan, you must constantly adjust and update it. But how? And when?

The best time to check your progress is at the end of each month or when paying bills. Take a few minutes to review what you've spent. Make a note of any shortfalls or surpluses you have on specific expense lines on your budget. If you've spent more than you expected on a specific item, examine it carefully. Is it an anomaly or did you miscalculate? If you miscalculated, review your budget for any surplus that could cover a deficit elsewhere. If you're way over budget, start the whole process again and find a way to cut back.

Step 8: Go back and negotiate for more if you need it.

Surprisingly, this last step works occasionally. The odds may be against you, but try anyway. It may be particularly hard to negotiate for cash from your employer several months after a termination, but you may fare better with non-cash items, such as continued perks, subscriptions and publications, access to the corporate library or secretarial help. All of these will help you find a new job and get you off your employer's conscience. Again, the worst that can happen is you'll be turned down.

While you may not have enjoyed painting this financial picture of yourself, at least with this information in hand, you're in control of the details.

--Ms. Galos is an attorney in Millerton, N.Y., who specializes in employment law and human resources. Dr. McIntosh is a freelance writer in Oceanside, N.Y. They are co-authors of "Firing Back: How to Cut the Best Deal When You're About to Lose Your Job" (1997, John Wiley & Sons), from which this National Business Employment Weekly article is adapted.