Money / Financial Planning
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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.
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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.”
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.