Spending and Saving

What to Do After Taking a Pay Cut

Pay cuts aren’t fun or easy, but by carefully budgeting, you can thrive on a lesser paycheck. Spending smarter will pay off.

Pay cuts can be an unfortunate fact of life. Relocation, finding employment after a layoff, backing away from a toxic workplace, or changing careers can all result in a pay cut.  

Whether a pay cut is carefully planned and temporary, such as in a midlife career change, or happens without warning, taking key steps toward handling the financial situation will help you weather the storm well.  

Apply for Partial Unemployment Benefits  

If you were downsized, with your pay cut to zero, apply for unemployment. The Families First Coronavirus Response Act, signed into law in 2020, allows states to extend unemployment benefits up to 13 weeks and to offer benefits to the self-employed. 

In some states, you may be eligible for partial benefits due to a salary reduction.  

Check with your state’s unemployment office to find out if you are eligible for benefits.  

List Your Expenses  

If your pay is cut, creating a new budget should be among the first steps you take. Gather all your bills and list your expenses. 

If numbers aren’t your strong point, don’t worry. Budgeting apps such as Mint and YNAB can do the calculations for you.  

Reconsider Your Spending  

If you’re used to spending $10 or more for lunch in a restaurant each workday, start brown-bagging a sandwich or leftovers from home. 

Coffee shop in the morning? Switch to brewing your own coffee and taking it with you in a travel mug or Thermos. Those smaller expenses add up.  

Look for Cuts  

Do you have a gym membership but never go? That’s an easy cut to make. Ditto for streaming services – if you don’t watch them, you’ll never miss them.  

Are you an avid reader? Get a library card and borrow books instead of buying them. Need clothes? Shop consignment and thrift stores.  

Take a look at your grocery budget and look for ways to save. Changing supermarkets to get better deals can make a difference, as can changing what you eat. Economical dinners can also be healthy and delicious.  

If going out with friends to restaurants is a habit, have them over to your place for a potluck supper or game night instead.  

Are there big things you don’t need? Sell your boat, your motorcycle, or your second car if your family can get by on one vehicle.  

Renegotiate to Lower Costs  

We’ve already recommended trimming smaller expenses. Now you should look at the larger ones, where a renegotiation can save you hundreds of dollars each month. Shop around on cell phone plans. Carriers can differ widely in price.  

Changing car insurance companies and bundling home and auto insurance can save you serious cash.  

If you own a home, consider refinancing to take advantage of lower interest rates, or change from a 15-year note to a 30-year note for a lower payment. Once your finances improve, you can always pay extra to catch up on paying off your mortgage. Or sell your home and downsize.  

Don’t Be Penny-wise and Pound-foolish  

While it may be tempting to cut expenses such as health or life insurance to save money, not having these protections can cost your family thousands of dollars if you become sick or pass away.  

Check to see if you qualify for Medicaid or whether your children qualify for CHIP, or child health insurance programs, in your state. If you don’t, and you’re healthy, getting a catastrophic care policy to protect against large medical costs.  

Term life insurance should be a consideration if you have a spouse or children.  

Consider a Side Hustle  

Gig apps such as Uber and DoorDash can boost your income, as will marketing your skills. You may find that your photography side hustle becomes your new career.  

The Bottom Line  

Pay cuts aren’t fun or easy, but by carefully budgeting, you can thrive on a lesser paycheck. Spending smarter will pay off.  

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