Taking a pay cut, whether it happens by choice or due to circumstances beyond our control, can feel like a setback. You may worry that you won’t be able to keep up with current bills and expenses or feel stress or panic over whether you’re able to meet your financial goals for the future. If you are faced with an expected or unexpected pay cut, follow these steps to regain control of your financial health.
Review Your Budget
One of the first steps necessary after a pay cut is to look at your budget (or start a budget if you don’t already have one in place). Amy Maliga, financial educator at Take Charge America, recommends starting by figuring out the baseline amount you need to meet your essential obligations. This includes housing, food, transportation, utilities and any other recurring bills like credit card payments.
Once you have a clear idea of the changes to your budget, it’s time to reevaluate your new expenses. Kendall Clayborne, CFP at SoFi, said to take all benefits into account. These benefits, particularly for those that take a pay cut in a new job, may range from new health insurance costs to getting an employer match in your 401(k) program.
Expenses may change for you, but some of these changes could be for the better.
“It could be that you end up getting better, or lower cost, benefits and that offsets some of the income you will be losing,” Clayborne said. “From here, you can get an idea of what changes you will have to make to balance your budget.”
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Consider Easier and Harder Changes To Lower Expenses
Clayborne said that there are easier changes and harder changes that come with figuring out how to lower expenses.
“You can start by focusing on the discretionary spending, but ultimately if you are taking a significant pay cut, stopping your Netflix subscription and skipping Starbucks may not be enough,” Clayborne said.
Some situations may call for making bigger adjustments, like downsizing. This can be a lot more work, but Clayborne said for many people the harder changes may have the bigger impact.
Mapping out your new budget will be a significant help in figuring out if you should use easier or harder changes. The new budget will help you determine if changes in discretionary spending are enough and to see what takes up the biggest portion of your spending and make adjustments from there.
Ruthlessly Cut Expenses
If you have found opportunities to cut expenses that go beyond coffee and streaming services, it’s time to get ruthless about cutting these items from your budget.
Maliga said two budget categories where there is lots of wiggle room are food and entertainment. Start preparing most, if not all, of your meals at home instead of dining out or ordering in. This includes brewing your own coffee in the morning and enjoying happy hours at home with friends after work. Cancel cable if you haven’t already and eliminate all but one streaming service. If you have any upcoming travel plans that aren’t already paid for, nix them.
Negotiate Lower Rates With Service Providers
Once you have a clear idea of easier and harder changes you can make to cut expenses from your budget, it’s time to seek out ways you can pay less for services like cellphones and auto insurance.
“Try to negotiate lower rates with your existing providers,” Maliga said.
This approach may take a few phone calls, but don’t give up. Maliga said you can often get service providers to agree to offer the reduced rates they use to lure new customers. This is especially true if you let them know you’re willing to take your business elsewhere.
In the vein of ruthlessly cutting expenses, it may be necessary to do that to regain financial health when faced with a pay cut.
“There’s always a company offering a lower rate than what you’re paying now, you just need to find it,” Maliga said.
Contact Credit Card Companies
Individuals carrying credit card balances should contact the card companies. Maliga said you may inquire if the company would be willing to negotiate lower interest rates so more of your monthly payments can go toward paying down your debt.
In the event of an unexpected pay cut that presents financial hardship, Maliga recommends contacting the credit card company for assistance.
“Many creditors offer temporary hardship plans that can reduce or eliminate payments for a short time, which will help you adjust to your reduced cash flow,” Maliga said.
Do Not Cancel Your Life Insurance
As you cut back on varying expenses, Kimberly Strosnider, ChFC, president and founder of Estate and Wealth Management Services, said do not cancel your life insurance plan.
Canceling life insurance during a moment of financial struggle is something Strosnider has seen happen too many times. While the idea of cashing in on this plan is tempting for many, it is incredibly important to keep it for the sake of your family.
“Think about how hard it would be for your family, especially if you are the breadwinner, to survive if something serious happened to you,” Strosnider said. “It can be tempting to cash in if it’s a cash value policy or to cancel if it’s a term policy, but after keeping a roof over your head, the lights on and food on the table, it could be one of the most important things you pay for.”
“Don’t stop saving,” Clayborne said. Even if you’re making less with a pay cut, put away some money toward retirement and any 401(k) matches offered by your employer.
Prepare For the Worst Case Scenario
If you receive an expected or unexpected pay cut, Strosnider recommends being financially prepared before it happens.
“Have savings that equal at least six months of absolute expenses put aside so you are not in panic mode,” Strosnider said. “This will give you time to adjust to your pay cut if it was voluntary, or to investigate the possibility of new employment if the pay cut was unexpected and out of your control.”
Do Not Panic
It’s easy to panic or emotionally spiral out of control when faced with a pay cut. Give yourself grace and avoid defaulting to negative thoughts surrounding this change in pay.
“You’re still employed and receiving a regular, although smaller, paycheck,” Maliga said. “With some adjustments you can make it work.”
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