Pay is no longer assured no matter what your job is these days, as more and more people are experiencing pay cuts. Whether your hours are reduced, or whether you lose your job and have to start somewhere else for a smaller salary, pay cuts are increasingly a reality. And, in some cases, you might even want a pay cut so you can achieve other goals.
No matter why you end up with reduced income, the important thing is to make sure that your finances will survive if a pay cut happens. And, of course, if you are thinking of dropping to part-time to pursue other opportunities, or if you want to cut back on your hours in order to spend more time with your family, you will need to make sure your finances can handle the change, and maybe even downsize your lifestyle. Here are some things to do now to prepare for a pay cut later:
Pay Down Debt
This always seems to be at the top of any financial preparedness list – and for good reason. When you have obligations hanging over your head, your money is not your own. It’s money that’s already spoken for. If you take a pay cut, you end up with a larger portion of your income going to debt obligations, rather than paying for your day-to-day expenses. Pay down debt as much as you can, and you’ll be in a better position if you make less.
Sock Away Extra While You Can
Don’t blow it all if you are earning good money now. Plan ahead instead by setting money aside while you are making it. Bank your extra money in a high yield savings account or some other liquid location. That way, you’ll be able to build up a stockpile of cash to draw on later. Back in my journalism school days, I had a professor who said it was important to have “F-U Money” so that if you decided you needed to leave, you could. While there’s nothing wrong with spending your money on fun stuff, don’t spend it all. That way, you’ll have have the ability handle a pay cut a little better.
Don’t Borrow to Your Limit
When my husband and I were house shopping back in the fall of 2007, we had lenders willing to approve us for what amounted to a monthly payment of 40% of our income. We could have done it. We could even buy a house with a payment amounting to 1/3 of our monthly income, keeping with the popular rule of thumb. However, we wanted some breathing room. When we bought, our payment was roughly 1/4 of our income. Now, all of our housing costs are less than 1/5 of our income. If we have to take a pay cut, it will take a true financial catastrophe to make our home unaffordable.
The same principle can be applied to car purchases and other major borrowing decisions. Just because you are approved for a loan, and just because you can afford the payment now, doesn’t mean you should go for it. If you have to stretch to “afford” it, or if the payments are just within the realm of comfort, you could see serious problems if your pay is cut.
Do an evaluation of your financial situation right now, and determine if your finances could handle an income reduction. If they can’t, it’s time to re-evaluate your habits.
You can never be too prepared for the unexpected.