If you’ve recently experienced a pay cut, you’re likely trying to make sense of what this means for you and your career. It directly affects your salary, but it may also affect other benefits, like your insurance eligibility and retirement savings, as well as your larger career goals.
In times of recession or industry downturns, it’s relatively common for companies to implement pay cuts as a strategy to keep the business alive. In these cases, it may be best to hang on and understand that it’s a temporary stress everyone at your company is experiencing.
In other cases, your company may be redirecting cash flow, assessing salary rates, or at its worst, trying to get you to quit. If the pay cut isn’t fairly implemented, it may be time to reconsider your position. If the pay cut seems discriminatory or punitive, targeting specific people or following a complaint of harassment, then the pay cut may be illegal and you’ll want to look into your local laws.
It’s hard news to hear, especially since you can’t control how much your company pays you. However, you can control how you manage your lifestyle through financial hardships, and if the career path you’re on is right for you. Follow these five steps to help you get a handle on your career and financial situation or skip to the infographic below.
1. Find Answers to Your Questions
You likely have several questions following your pay cut, and you have every right to ask your employer about their plans for your salary. Understand as much as you can about your pay cut so you can better prepare for your future.
Why Am I Receiving a Pay Cut?
If you haven’t already, you should get right to the point and ask why you’re receiving a pay cut. If they’re adjusting salaries to meet market rates, then you should consider if that’s something you can negotiate or what management may be looking for in your performance. Similarly, you’ll want to know who all is affected. If it’s just your team, then they may be looking to cut back and planning layoffs.
Is This a Temporary Pay Cut?
If your employer can ensure you this is temporary you should expect a timeline on when they anticipate your rate will return to normal. You may also want to ask about reimbursement for this time or other benefits to help alleviate the burden. If the pay cut is your new salary rate, it may be time to look for other opportunities.
How is My Work Affected?
Depending on the circumstances, it’s appropriate to ask what your employer’s new expectations are for your workload. If you were demoted, then expect your work to change. However, if your title stays the same and they significantly reduce your salary, it may be fair to negotiate your responsibilities.
What is the Company Doing to Improve?
This is a big question to ask if the company is implementing pay cuts across the board, as it likely means they’re struggling to keep the doors open. It’s important they’re transparent about what processes they’re implementing to secure your and the company’s future.
2. Adjust Your Budget
Adjusting your budget is going to be the first step in securing your financial foothold. With a new salary, you should calculate exactly how much money will be deposited after taxes and other reductions. This way you can accurately calculate your payments, savings, and spending money each month, and even prepare automated transfers.
Once you know how much you have, you may need to decide where you’re cutting your spending. A popular ratio tool is the 50/30/20 budget, where 50 percent of your income goes to necessities, 30 percent to lifestyle choices, and 20 percent to debt and savings. It’s also generally recommended that 30 percent goes to housing, leaving the remaining 20 percent on necessities for groceries, car maintenance, and more.
You likely built your lifestyle around your previous income, meaning necessities are more than 50 percent of your income and you can’t exactly change that. Your best bet is to reduce some of your lifestyle choices, which can be hard — especially when things like gym memberships are easy to place as necessities. To help you decide, list out all of your unnecessary expenses and prioritize them in three groups. Once you have a list of top priorities, add up the prices and decide if you can add a few more, or you need to remove a few.
3. Leverage Resources for Help
If you find yourself in a spot where you can’t make your payments, there are resources to help you. A good first step is to call your service providers and landlord. They may be able to be lenient on delaying a couple of months’ payments, and utilities may even be able to lower or set a standard rate to help you budget appropriately.
There are also government assistance programs you’ve been paying into throughout your career, so you should take advantage of the help that they offer. This can help with everything from healthcare and food to cash assistance. These programs may have income restrictions or other requirements, so check in on local resources that may be able to provide immediate aid.
It may also be tempting to lean on your credit card these coming months. Keep in mind that you still have to make regular payments on the card, so the extra bill and stress of seeing interest accrue likely isn’t worth it. However, it is available in emergencies should you find yourself needing to get groceries at the end of the month having just paid bills. Before you use your credit, have a plan to pay it off sooner rather than later.
4. Continue Saving
Ideally, your pay cut won’t prevent you from paying into your various savings accounts. If you weren’t already saving, then now is the perfect time to begin — especially if you’re now looking to change careers.
As mentioned earlier, 20 percent of your income should be going toward savings if you can swing it. These can be retirement accounts, emergency funds, or accounts for future purchases like a down payment on a house. Depending on how much your salary dropped, you may have to lower your payments across the board or choose one account to continue paying into.
Generally, you’ll want to prioritize your retirement and emergency funds. A new car is great, but retirement is better. You’re already making large financial adjustments, so unless you can guarantee your salary will return shortly you’ll want to continue padding out your emergency fund for when you need it. You don’t want to stop saving unless you absolutely have to.
5. Plan Your Next Move
Now that you’ve done what you can to secure your current situation, it’s time to look forward to your next move. Ideally, you have an expectation of how long your current salary rate will last at your company — if it’s indefinite, it’s probably time to move on and look for something new. If your company has outlined strategies to improve and provided a reasonable timeline, then you may choose to stay and lend a hand.
If you stay at your company, you have the opportunity to negotiate for retroactive payment or a salary increase based on your proven value. To make a solid case you’ll want to track your efforts in the coming months and recall ways you’ve excelled throughout your career. Try to quantify your contributions to the company with things like sales numbers and positive client surveys. It’s also important that you’re consistently a hard worker and continuously deliver on your core responsibilities.
If the circumstances of your company’s struggles are recession or emergency-based, then trying for a new job is going to be competitive, and many companies likely aren’t hiring. You may be able to make the most of your lighter workload by learning a new skill or pursuing networking opportunities to improve your career prospects. It’s also a good idea to spend some extra time on your resume and cover letter, and brushing up on your interview skills.
How To Manage Your Lifestyle on a Smaller Income
The reality is that spending will be a little tight on your new income. While you may need to cut out some luxuries, you can still have the occasional night out or morning latte. There are steps you can take to manage your lifestyle on a smaller budget.
Separate Wants From Needs
Manage your spending by knowing what are true necessities, and what are wants or expectations you have set for your lifestyle. You don’t have to remove all wants, but make a list of your wants and organize them by priority. You can keep your gym membership and Friday lunch, but you may not be able to keep your kickboxing class, too.
Limit Your Fun Money
You can be fiscally responsible and still spend a couple of dollars on yourself. The most important thing is setting a limit and using that to plan how you’ll spend your money. This way it’s harder to overspend because you have another purchase you’re looking forward to.
Be Intentional With Your Spending
Make sure that even fun purchases are made with an intention instead of giving in to instant gratification. This will help you follow a budget and you won’t feel guilty about how you’ve spent your cash.
Losing your income is hard and, honestly, frightening. You may have to make some lifestyle changes and adjust some of your plans, but it is temporary. The best thing you can do is build a plan to manage your financial health before planning your next moves.
Sources: Career Addict | Timesheets | Bureau of Labor Statistics 1 & 2 | U.S. Census Bureau | Equal Employment Opportunity Commission | The American Institute of Stress | The Board of Governors of the Federal Reserve System