How to Handle a Pay Cut

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how to handle a pay cutI recently found out with very short notice that my nutrition class was no longer being offered at the local community college. Long story short, my class was 1 of 8 classes in an orientation week for caregivers who just got hired to work in group home settings. All but 2 classes were dropped by the company who paid the community college to run them. I’ve been teaching this class for 3 years and it was the best paying job I’ve had- I only had to put in 8 hours a month to bring in an extra $430! So how should I handle a pay cut??

This obviously affected our budget and we had no warning whatsoever that allowed us to prepare for this pay cut. I had just set up our budget for 2016 to reflect our goals for next year but we had to make some changes we weren’t too thrilled about. Here are the 3 things we did to handle a pay cut and made it less painful than it could have been:

1. Live off of one income

The absolute best way to handle a pay cut is to live far below your means in the first place. For us, we have always lived off of one income – quite frankly, just because it was the stress-free way to go! If we hadn’t started here it would have been way harder to cut back on our expenses.

When my husband and I graduated college and started working, we lived off of a percentage of his income, so the remaining portion of his income and anything I brought in went to my student loans (we paid off $30k in 9 months!). Once loans were paid off we moved on to an emergency fund, increasing our tithe and savings, etc. My income was solely used for goals.

It did help that we started off as broke college students so a low standard of living wasn’t anything new for us. I imagine it would be more of challenge if you were previously living off of two incomes and had to figure out how to live off of one. Living off of one income made any surplus income a bonus which means we weren’t scrambling to figure out how to make our next mortgage payment. Want to handle a pay cut like a pro? Think ahead and live on less.

handle a pay cut2. Trim non-essentials

Alright, so the clippers are out – what would you cut out of your budget first? For many people, the grocery budget gets scrutinized but since I view your health as an investment, I would look elsewhere to do your significant trimming (but certainly go ahead and cut out any beverage besides water and also filler snacks that you don’t need).

If you need to handle a pay cut immediately, consider cutting your cable, driving less to save on gas, cancel your gym membership, lower entertainment spending, hold off on buying new clothes, cancel subscriptions, and implement energy saving activities like waiting a little longer to start using the heater or air conditioning. These non-essentials are things that are nice to have, but you can obviously live without them if you need to handle a pay cut.

Eventually you can add things back in, but for now, honor your budget and don’t go in the negative. Those non-essential categories suggested can add up to a hefty monthly amount.

3. Prioritize financial goals

Thankfully, we were already living off of one income when my nutrition class got dropped and I had to handle a pay cut, but it did affect how we approached the financial goals we had in mind. For example, we wanted to start putting money into a college fund for our 2nd daughter (due early November) but that’s on hold now. I know for some parents, saving for their children’s college is a big deal but we plan on doing something similar my parents did (pay for first year then you’re on your own) so I’m okay dropping this rather than cutting back on our own retirement investments. We were also hoping to put extra toward our Roth IRAs this year, but that doesn’t look like it will happen and we’ll just have to stick with investing 15% of our income. A pay cut or job loss is never a fun situation to experience and we rarely see it coming. However, smart planning, having a solid grasp on what your budget looks like, and knowing your financial priorities can help you bounce back without as much collateral damage.

Have you had to handle a pay cut recently? How did you manage your finances with this change?

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Money

Derek

AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

2 Comments

  1. We did the same with one income. When my wife and I both worked we lived on my income only which was the lesser of the two. When she quit then it wasn’t a big deal. Luckily by that time my income had nearly doubled. I always tell folks it is better to plan in the good times and live frugally than to be forced when the hard times come. A little planning can save a lot of heart burn.

    • Well said, Lance. Starting off being so frugal certainly saved us a lot of stress and potential fights about money. Thanks for sharing.


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