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How To Survive A Major Pay Cut

January 23rd, 2007 · No Comments

Whether you voluntarily gave up a job or you were forced to accept a lower-paying position I’d like to show you some ways of coping with it. My wife and I recently experienced the birth of our third child and decided that one parent would stay home with the kids. In our particular situation it amounted to a 52% reduction in our household income. Granted it wasn’t an unexpectected layoff or forced salary reduction so we were able to plan for it, but it still required a mindset change that was tough to accept at first. Below are some tips for you on how to cope with an income loss or pay cut.

  1. Develop a budget. Yes, I know for some of you that’s a four-letter word but at a bare minimum you need to at least know where the majority of your money is going. In Larry’s Burkett’s Complete Financial Guide for Young Couples: A Lifetime Approach to Spending, Saving and Investing he mentions that 10% of us are rich enough to not need a budget, 10% of us actually have a budget and that 80% of us do not. Can you answer these questions within 5% accuracy?
    • How much cash do you withdraw per month from ATMs and where does it go?
    • Do you balance your bank account monthly? If not, convince me that there aren’t merchants who mistakenly overcharged you for a good or service.
    • How much do you spend on your car and car service per month? For most people this is the second-biggest expense next to paying a mortgage or rent.
  2. Decide which items in your spending are a want versus a need. All of us have the same basic needs of shelter, food and clothing. Other obvious needs include insurance (health, auto, etc.), basic utilities such as electricity and water as well as various household convenience items like a microwave and dishwasher. However, what about that Netflix service at $20/month? Or playing golf twice a week in the summer? Or maybe taking a cruise every year? At your previous income level these items could be purchased without much of an impact to the household budget. Now that your income is reduced do you need to play golf so often? Could you take up a cheaper or nearly free form of exercise like jogging, tennis or basketball? If Netflix costs you $240/year could you get similar movies from the library for free? Most libraries now will let you reserve DVDs online through their website. Once you’ve weeded out all the extraneous wants I would estimate many people can save 10 – 30% on their spending. Keep in mind that these may not be permanent spending cuts. They might be only temporary cuts for a couple months or years depending on your situation.
  3. Can you lower your grocery bill? You don’t need to take it to the extreme like this couple, but you could start buying some generic brand name items. You can see some major savings buying generic items as detailed here.
  4. Are you “car poor”? Noted personal finance expert Dave Ramsey recommends that your car’s value should not be more than 50% of your household income. Let’s suppose your annual household income is $70,000. You drive a $20,000 minivan and your husband has a $25,000 truck. The total value of these automobiles is $45,000 which is 64% of your household annual income. This is a problem. Unless you and the family are living in one of those vehicles this is too much money tied up in the world’s worst depreciating asset. If you can get over the whole car-as-a-status symbol thing, you’ll save tons of money on car spending.
  5. Call your bank and see which loans or credit cards they will lower for you. First of all, banks absolutely will not offer this to you out of the clear, blue sky. You need to light a fire under their seat and threaten to leave the loan with a competing lower rate. Or just ask them to lower it like my brother, Dad and I all did here. You will be amazed at how responsive the bank customer service representative is when she realizes that her employer may lose your business.
  6. Pay cash. It is amazing how much you appreciate your purchases when you need to save up for them. The reason credit card companies (and casinos) are billion-dollar enterprises is because they have successfully removed the emotion from spending. Anyone can sign the credit card receipt for pay for a $45 dinner out with the family and think nothing of it. But when actual green cash is involved coming out of your wallet bill by bill somehow you are more aware of this spending. And it’s more painful for you, thus reducing your spending.

Hopefully your major pay cut will be temporarily short term or it was a pay cut chosen by you on your terms. If not, I hope the tips above can provide you some ammunition in battling a reduced household budget.

Tags: Money