A pay cut, whether big or small, can catch you off guardâand throw your finances into disarray. While a salary cut is different than a layoff, it can leave you feeling just as uncertain.
How do you deal with a pay cut and deal with this uncertainty?
There are strategies to help you navigate both the emotional and financial challenges of this situation. One key element? A budget. Whether you need to create a budget from scratch or adjust the budget you already have, doing so can help you get back on your feet and set yourself up for success.
Hereâs a rundown of budgeting tips to survive a pay cut to keep your finances intact:
Ask your employer for the parameters of the income reduction or salary cut
First, keep in mind that a pay cut typically isnât personal. According to Scott Bishop, an executive vice president of financial planning at a wealth management firm, businesses often cut salaries to preserve their cash reserves while they stabilize their cash flow or weather some larger economic impact, like the coronavirus pandemic.
Secondly, make sure you understand the full scope of the salary cut. Bishop suggests you ask your employer questions like:
What is the amount of pay being cut?
Why is pay being cut?
When will the reduction begin, and how long will it last?
Will any of the following be affected?
Healthcare or insurance costs
Employer-sponsored training or continuing education opportunities
Hours or job responsibilities
What are the long-term plans to improve the companyâs financial situation?
Once youâve painted the full scope of what and why, you can determine how to handle the pay cut.
âFor some people who are big savers, it might not be a big deal,â Bishop says. âBut for some people who live paycheck to paycheck, itâs going to be significant.â
Settle any anxieties that might come with a salary cut
If you are dealing with financial stress, try settling your mind and emotions so you can make decisions with a clear head.
âThe emotional and mental toll can be one of the hardest parts,â says Lindsay Dell Cook, president and founder of Budget Babble LLC, which provides personal finance and small business financial counseling. âIt gets even harder if there are others depending on your income who are also financially stressed.â
When sharing the news with family members who may also be impacted, Cook suggests the following:
Find the right time. Pick a time of day during which everyone will have the highest mental capacity for the conversation. âFor instance, I am a morning person, so if my husband told me at bedtime about a pay cut, I would have a much harder time processing that information,â Cook says.
Frame it as a brainstorming session. Bring ideas of what you can do to handle the pay cut, such as a list of expenses you can cut or a plan for how you can make extra income.
Empathize with the other person. âReduced income is not easy for anyone. Everyone responds to financial anxiety differently,â Cook says.
“If youâre unable to maintain your previous level of saving after a pay cut, try to save at a smaller scale for goals like retirement and your emergency fund.”
Create or adjust your budget to handle a pay cut
Once you understand the salary cut and have informed your family or roommates, itâs time to crunch the numbers. Thatâs the first step to figuring out how to save money after a pay cut.
If you donât have a budget, find a budgeting system that fits your needs. Learning how to effectively budget takes time and practice, so be patient with yourself if youâre new to this. Cook suggests reading up on how to create a budget.
One system to consider is the 50-20-30 budget rule, which has you break your spending into three simple categories. If you prefer the aid of technology when determining how to handle a pay cut, there are many budgeting and spending apps that can help you manage your money.
Whether youâre handling a pay cut by creating a new plan or modifying an existing budget, Bishop suggests taking the following steps:
Add up your income. Combine your new salary with your partnerâs pay, and factor in any additional income streams like from dividends or savings account interest. Tally up the total.
List your expenses. Be sure to include essential expenses (e.g., housing, food, clothing, transportation) and nonessential expenses (e.g., entertainment, takeout, hobbies).
Look through your bank statement online and your past receipts so all expenses are included.
Account for infrequent expenses such as gifts, car maintenance or home repairs.
Track the amount you save. Note any regular savings contributions you make, such as to an emergency fund or retirement account.
Get your partnerâs buy-in. What needs do they have, and what is nonnegotiable in the budget for each of you?
Cut expenses with budgeting tips to survive a pay cut
If youâve crunched the numbers and found that your expenses add up to more than your new income, youâll need to find ways to cut back. Here are some tips on trimming your spending to survive a salary cut:
Cut back on takeout meals and stick to a strict grocery list or food budget, Cook suggests.
Avoid large discretionary purchases like a car during the duration of your pay cut, Bishop says.
Negotiate with your utility companies or ask if theyâre providing forbearance options, Bankrate suggests. You can also ask your car insurance provider if it has additional savings for customers who are driving less, according to Bankrate.
If you think you might fall behind on rent or mortgage payments as youâre handling a pay cut, both Cook and Bishop agree that early, proactive communication is key. Be honest with your landlord or mortgage company. âDonât wait until youâre past due,â Bishop says.
The same applies for other financial obligations, such as your credit card bill. Youâll likely find those companies are willing to work with you through the rough patch.
Cook also suggests you look into municipal assistance programs as a budgeting tip to survive a pay cut. âMany cities have established rental assistance funds to help taxpayers meet their obligations during the pandemic,â she says.
Continue to save money after a pay cut
As you consider how to cut costs, take time to think about your long-term savings goals and how to save money after a pay cut. By cutting discretionary spending through your new budgetâwhat Bishop calls âcutting the fatââyou may have freed up income to maintain your good saving habits during this time. He says itâs important to do that before slowing down on savings.
If youâre unable to maintain your previous level of saving after a pay cut, Bishop suggests you try to save at a smaller scale for goals like retirement and your emergency fund.
As you work to save money after a pay cut, Cook recommends setting up automatic transfers to your savings account every payday based on the amount youâre able to put towards savings in your new budget.
âIf your savings account is at the same bank as your checking account, you can transfer those funds fairly easily,â she says. âSo the worst-case scenario is that you put too much money in savings and have to bring some back to checking. The hope, however, is that some or all of those funds transferred to savings remain there since that money is no longer in your checking account just waiting to be spent.â
Seek extra income sources after a salary cut
You should explore additional sources of income if you need more cash to cover essential expenses or if youâre looking for ways to save money after a pay cut.
Determine if youâre eligible for benefits based on the reason for your pay cut. Cook recommends applying for unemployment if you think you may qualify. For example, some workers who experienced pay cuts due to the coronavirus pandemic were eligible for unemployment benefits. The details vary by state, so visit your stateâs unemployment insurance program website to learn what benefits may apply to you.
If you or your partner have some extra time on your hands, you can consider bringing in income through a side hustle to help you handle your pay cut. Bishop suggests using free or low-cost online video tutorials to boost your existing skills to make your side hustle more effective.
Cook also recommends getting creative. âAre there things you could sell to make some extra cash?â she says.
If you are unable to find additional sources of income, but you have an emergency fund, consider whether you should dip into that. “Your savings are there for a reason, and sometimes you need to use it,” Cook says. “That is okay.”
Stick to your updated budget to navigate how to handle a pay cut
Making your budget part of your daily routine is a budgeting tip to survive a pay cut, and it will help you save money after a pay cut.
âBuild rewards into your budget, such as ordering out every other week if you successfully saved money after your pay cut.â
âIf youâre checking it daily, there are no surprises,â Cook says. You can do this by logging into your bank account and making sure your spending and expenses align with your digital or written budget document.
âIf you see that your spending is high, your mind will typically start thinking through [future] transactions more thoroughly to vet if those expenses are really necessary,â Cook says.
Donât forget the fun side of accountability: rewards for meeting your goals. Build rewards into your budget, Bishop says, such as ordering out every other week if you successfully saved money after your pay cut.
Lastly, donât try to go it alone. Enlist others in your budgeting journey, Cook suggests. Make up a monthly challenge to cut spending from a specific category in your new budget and ask your partner or a friend to do it with you. For example, see if you and the other participants can go a full month without buying clothes or ordering takeout. Compare notes at the end of the month and see how much youâve saved.
Another idea? Try connecting with a budget-minded community on social media to get inspired.
Take these steps after the salary cut is over
Once youâve handled the pay cut and your regular pay is restored, donât give up on your newfound budgeting discipline. Instead, focus on building up emergency savings before you go back to your normal spending.
Bishop recommends starting with enough savings to cover three to six months of expenses. âIf you spend $3,000 a month, that means you need to have $9,000 to $18,000 saved.â
This might also be the time to revisit your budget and build a more extensive financial plan with a CPA or financial advisor to account for all of your future goals. Bishop says that these can include a target retirement date and lifestyle; your estate planning, such as a will, trust and power of attorney; saving for a childâs college; and purchasing a home.
Bishop says reminding yourself why youâre budgeting and focusing on your financial goals can be similar to motivating yourself to stay physically fit. Goal-based motivation can keep you accountable.
Remember: You can survive a salary cut
Handling a pay cut is never easy, but you can get through this time. While youâre in the thick of it, focus on budgeting tips to survive a pay cut and staying positive. Seek help from others and follow up with your employer to make sure you are aware of any changing details regarding the pay cut.
Most of all, try to keep a long-term outlook. âRemember that it will not always be this way,â Cook says.
If youâre considering whether or not to tap into your savings to handle a pay cut, read on to determine when to use your emergency fund.
The post How to Handle a Pay Cut: Budgeting in Uncertain Times appeared first on Discover Bank – Banking Topics Blog.
Deia Schlosberg had been working as an environmental educator, teaching students about issues concerning conservation and sustainability. While she loved teaching, she wanted to reach people on a larger scale about the importance of protecting the environment. So she decided to follow her dream of becoming a filmmakerâa dream that would require her to return to school for a graduate degree. She had no idea at the time that it would lead to becoming an award-winning documentarian.
While Schlosberg’s choice may have paid off, learning how to pay for grad school as a working adult can be a challenge. There are various benefits to getting an advanced degree: You can learn more, you can earn more, you can further advance in your current job or prepare for a career change. However, you might also find yourself stressed by the expense and resulting debt of it all, especially if you have kids, a home or other financial commitments. So a big question on your mind could be, “How much should I save for grad school?”
Below are some lessons on how to financially prepare for grad school to help you determine if and when you should go back to school. If you haven’t yet decided if graduate school is right for you, see section 1 for tips on how to decide. If you already know you want to go back to school, skip to section 2.
1. Decide if going back to school is right for you
Getting an advanced degree may seem like a ticket to success, but depending on your chosen area of study, the outcome may vary. For Schlosberg, it was a bit of a risk. It can be difficult to get a break in the film industry, and going to grad school could mean carrying around debt for a long time. Is this the type of outcome you would be willing to accept?
According to Emma Johnson, best-selling author, career consultant and founder of Wealthysinglemommy.com, there are a few things you can do to help you decide whether or not going back to school is right for you:
Do your homework. When considering how to pay for grad school as a working adult, research your degree options and the jobs to which they might lead. Compare cost and compatibilityâfor instance, will classes for the program align with your work schedule? Once you’ve determined what kind of occupation you may pursue after grad school, search online for information about that occupation’s average earnings.
Solidify your goals. You may find clarity in writing out your goals for going back to school. Some benefits are tangible, like earning more money, building a professional network and gaining skills. Others might be less tangible, such as finding personal fulfillment. Once you know your goals, it will be easier to determine if a graduate degree makes personal and professional sense.
“Your savings should not only depend on tuition but also what the degree isâi.e., how easy it will be to repay once you are working in the desired field.”
Give your degree program a test run. Consider taking classes that relate to the degree you are interested in getting in grad school. These classes can give you a taste of the subject matter you’ll be studying and help you meet people involved in the field. Also, if prerequisites are required for your advanced degree, they often cost less online or at a community college, which is important to remember when thinking about how to prepare your finances before grad school. Make sure the course credits will be accepted at the graduate school you plan to attend.
Take a hands-on approach. To level up in your existing career or find out what it’s like in a new field before making the change, get some work-related experience first. For instance, to learn more about moving up in your own field, get out and meet those higher level professionals by attending conferences and networking events. The same tactic applies if you want to change careers.
2. Know how much you need to save
How to pay for grad school as a working adult can be complicated, but you’ve decided you’re ready for it. Plus, hitting the books at a time when saving for retirement or your child’s education could be at the forefront makes the task of how to prepare your finances before grad school even more critical.
Figuring out how much to save for grad school begins with determining the cost of attendance. Here are a couple ways to do that, according to Johnson:
Do the research. Once you have found a school and degree that you like, visit the school’s web site. Some schools may provide the cost of tuition, fees and estimated costs for books, supplies and transportation. Costs can vary tremendously, depending on various factors: whether you attend full or part time, whether you attend a public or private school, whether you are an in-state or out-of-state resident and the time it takes to get your degree.
Determine your budget. Once you have a handle on the school-related costs, build a spreadsheet that accounts for these costs and projects monthly income and living expenses. Working through a savings plan beforehand can help you financially prepare for grad school by showing just how much you’ll need to budget for monthly on tuition plus living expenses. Once you determine these factors, you’ll get a better idea of what you need to save up.
Create a savings buffer. After you determine your monthly costs, pad that number. “Your savings should not only depend on tuition but also what the degree isâi.e., how easy it will be to repay once you are working in the desired field,” Schlosberg says. She saved a little more than she estimated, giving herself an extra cushion to cover some of the potential risk to her finances.
“You may have to downscale your career and current lifestyle to go back to school, which may be a worthwhile investment of time and resources.”
3. Allow yourself a flexible timeline
One key factor in planning the timeline for earning your graduate degree: Don’t be in a rush. If you need to, create the time to save. It may not be necessary to go back to school full time or finish on a particular schedule, Johnson says. She mentions these possible paths to earning your degree when planning how to pay for grad school as a working adult:
Consider a side hustle. One option is to go to school full time and take on a side hustle. You may not make as much as you did as a full-time employee, but the income can complement your savings. It may also allow you to concentrate more on your degree and finish faster.
Attend part time. Go to school part time (nights and weekends) while working. It will take longer, but it will also minimize your debt, which could be better in the long run.
Take it slowly. Only sign up for a class or twoâwhatever you can affordâand continue to work. This part-time “lite” approach may take even longer, but could help you avoid overextending yourself financially or sliding into debt.
Take online classes. Consider online programs that could lower the cost of tuition and allow you to continue working full time.
4. Take advantage of potential cost-saving benefits
So you’ve done your research on how much you need to save while determining how to prepare your finances before grad school. But there are ways to potentially cut or eliminate some of those costs. What comes next are some solutions that may help pay your grad school bills:
Consider loans, financial aid and scholarships. “I took out some student loans for living expenses, but I tried to pay off my tuition as I went by working through school,” Schlosberg says. Graduate students may also be eligible for different types of scholarships and grants, which is aid that does not need to be paid back. Depending on your area of study, scholarships and grants can also be obtained through federal and state organizations, private foundations, public companies and professional organizations.
Ask your employer to pay the tuition. One way to financially prepare for grad school is to talk to your manager or human resources representative to find out if your current employer would help pay for, or fully fund, your degree through tuition reimbursement. This is most likely if you plan to move up the ladder and use your new skills on behalf of the company.
Take advantage of in-state tuition. Some people move to the same state as their desired school to try to get a break on tuition. “I moved to Montana and worked a couple jobs for a year before applying so I could get in-state tuition,” says Schlosberg. Whether you are already a resident or you move to a new state, be sure to determine how long you need to be a resident to qualify for in-state tuition at your desired university.
Cut back on discretionary expenses. Seemingly small things like adjusting your lifestyle to lower your monthly costs, which could mean fewer lattes and dinners out, might go a long way in resolving how to prepare your finances before grad school. “You may have to downscale your career and current lifestyle to go back to school, which may be a worthwhile investment of time and resources,” Johnson says.
Financially prepare for grad school and get a new start
Answering the question of how to pay for grad school as a working adult requires significant research and preparation, but some say it’s worth it, including Schlosberg. It not only gave her a whole new start, but a wealth of knowledge going forward to nurture her future endeavors. “Getting a graduate degree gave me the confidence to jump into a new career. I met an amazing network of people,” Schlosberg says.
But an advanced degree may not be a necessity. While it could look impressive on a resume, for many employers, a master’s degree is not a requirement. “Whatever you do, don’t go back to school just for the sake of getting a degree,” Johnson says. When thinking about how to financially prepare for graduate school, make sure it fits into your financial picture and that you’re able to âweigh your sacrifices against future gains,” she says.
The post Hitting the Books Again? Here’s How to Financially Prepare for Grad School appeared first on Discover Bank – Banking Topics Blog.