Millions of Americans faced pay cuts as the coronavirus pandemic affected industries. While many workers were laid off, some were furloughed, and others kept their jobs but at lower salaries as businesses struggled to stay afloat.
Some workers are reexamining their budgets to cut some of their expenses until they get another job or their employer restores pay cuts. Taking a pay cut means facing the reality of no longer living the same financial life.
Americans often aren’t so good at saving for emergencies such as a car repair or sudden illness, or for their retirement. A recent survey found that 59% of U.S. residents say they live paycheck to paycheck.
Less than 40% of working adults think their retirement savings are on track, and 25% have no retirement savings or pension at all, according to the latest Federal Reserve Report on the Economic Well-Being of U.S. Households.
Another alarming fact is that 4 in 10 adults have said that if they had an emergency and had to pay a bill of $400, they would have to borrow the money or sell an item they own. And that is in so-called normal times. Here are four strategies to handle finances after a pay cut.
1. Update Your Budget
There are several ways to deal with the changes to your budget after a change to your salary. Create a budget if you do not already have one. List all your expenses for weekly purchases, from groceries to gasoline and parking fees. Add monthly bills, including rent or mortgage, car loan, cable, cellphone, utility bills, credit cards, student loans, and any other debt such as personal loans.
Update your budget and examine all your expenses to see which ones you can lower or eliminate, even temporarily, for the next six months. Add your income and include part-time jobs, tax refunds, bonuses, and any child support, alimony, or help from parents. This will help you determine how much money you can spend for necessities, expenses, entertainment, and other items such as doctor visits.
There are several free apps that can help you manage your debt easily and update it as your financial circumstances change. To track your spending, decide if you want to track it daily, weekly, or biweekly. You might try different time periods before you decide on one. Some people prefer to keep up with their spending on old-fashioned pen and paper.
Others like to have online access to their spending so they can check while they are out shopping for groceries or other basic items. Many banks and credit card companies will also track your spending. You can download it into Excel or another spreadsheet or use an app like SoFi Relay.
After you track your spending for two or three months, you will see a pattern emerge of where most of your money goes. You can also look at older bank and credit card statements to see what you were spending money on last year compared to this year. This will help determine if you had one-time expenses such as medical bills, airplane tickets, hotel stays, wedding gifts, or a vacation. You might be surprised at what you’re spending your money on. For instance, you might be spending a lot of money on entertainment or buying gifts.
In addition to a budget, create a financial plan for both short- and long-term goals. A plan will help you determine when you can pay off any loans and how much you want to save, say, for a down payment on a house.
2. Cut Expenses
One place many consumers can cut costs is from entertainment, such as their cable bill or streaming services. These can really add up. Canceling all or some of these services can improve your cash flow, which is how much money you have left over at the end of the month. Another place where you can slash expenses is from your food budget. Consider using digital coupons, shopping at warehouse clubs, or going out to eat for lunch instead of dinner.
Your expenses include debt such as credit cards, student loans, and personal loans. Paying more than the minimum balance, refinancing to a lower interest rate. and making extra payments can help you pay down the principal amount, or the original amount that you borrowed, sooner.
Consider refinancing your student loans by checking out both fixed and variable rates. Interest rates are at historic lows. You might be able to pay down your credit card bills faster by taking out a personal loan; those interest rates are often lower. And if that’s the case, the debt could be paid sooner.
Automating the payment of bills can make your life easier. This will also help you avoid paying late fees. You can either have your bills paid automatically through your checking account or set yourself a reminder on your calendar if you have some bills such as utilities that are a different amount each month.
You can also automate your savings. You can have money taken out of your checking or savings account each month and have it automatically invested into your workplace 401(k) plan or an individual retirement account.
Snip, Snip, Snip
When your salary has been slashed, there are several ways you can save money immediately and long term.
Call your mortgage, auto loan, utilities, credit card, and student loan companies to see if you can defer payments for several months. Skipping a few payments can help you get back on your feet sooner. If the company cannot provide this option, see if the interest rate can be lowered on, say, credit cards.
Check with your local nonprofit organizations. Many provide food or partial payments for utility bills. Your local food bank is a good place to start; this can help you lower your monthly grocery bill.
Look online to see if stores are offering deals. Stock up on staples such as beans, rice, and pasta if they are on sale.
If you are still short of money, you might consider talking to family members and friends about obtaining a short-term loan or working on a small project to earn some extra money.
People who have been socking away credit card rewards for a vacation might want to go ahead and use them. Some credit card companies will let you transfer the rewards for cash to your statement or use them for food delivery.
Other companies let you use your rewards to receive gift cards. Using these gift cards at retailers that sell staples and necessities such as food, detergent, and other personal items can help you spend less money. Many credit cards will give cash back on purchases such as food and gasoline. See which credit cards are the most beneficial for your financial needs before signing up for a brand-new credit card.
Shop around and see if competitors can provide lower rates for your homeowner’s or renter’s, car, and health insurance. If you live in a deregulated area, see if there are cheaper rates for electricity so you can switch providers. Some utility companies will offer special deals or programs.
Another way to save money is to use cash for gasoline. Some gas stations offer a cheaper price for consumers who use cash. The savings can add up quickly, especially if you have a longer commute.
Check your budget every month and see if there are other ways you can save money. If your credit card company denied your request last month to lower your interest rate, try calling again. Rules at lenders can change often.
3. Save for Retirement
While it is easy to skip saving for retirement, it’s ideal, of course, to continue socking away some money each month from your paycheck into a 401(k) plan or IRA. The money you stash away for retirement can lower your taxable income, meaning you will owe the IRS less.
Continuing to save money for retirement is a good habit, especially if your salary reduction is temporary. You can also sock away your tax refund, bonus, or any additional income into a retirement account.
Once you stop contributing to a retirement account, it can be difficult to catch up on your retirement savings. If you have your retirement contribution automatically deducted from your checking or savings account, saving for your future is easier.
4. Track Your Spending
Anyone who doesn’t track what goes out would probably be shocked by the reality. SoFi Money® is a cash management account that keeps track of weekly spending—which then allows creation of a budget based on habits.
There are no account fees for SoFi Money® and you can earn cash-back rewards on spending. And SoFi members can gain financial advice—at no cost.
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