Global Recession. Slowdown. These two words often make the newspaper headlines these days. When the economy slows down, business prospects wane and pay cuts and job loss may become common in certain sensitive industries. What to do when you get to keep your job, but in turn your paycheck is slashed?
Assess the situation
Find out why it’s happening? Sometimes the pay cut might be an industry-wide trend. At other times it might be the result of a bad market/financial position of a company. If it’s got to do with the industry, assess by when the experts expect business to return to normalcy, if at all. Also find out if the pay cut is across-the-board or only for certain departments and people?
If pay cut has happened for only a few, perhaps it’s a hint to look for a job elsewhere.
Fully evaluate the financial implications
A pay cut can come in many forms, a simple slashing of your gross salary, a lesser variable pay or skipping of performance bonuses. Sometimes, certain benefits can go away– like travel or medical reimbursement.
Find out when will it take effect and its financial impact on your take-home salary.
Look for ways to maximize your pay cheque by making it more tax-efficient. Pay cuts are also an opportune time to negotiate a better work-life balance with your boss. Look at negotiating fewer hours or fewer work days or perhaps work remotely from home for some days. Compulsorily reduced working hours can be a blessing-in-disguise, as it could provide an option to moonlight elsewhere. Deliberate with the HR about the possibilities.
Make a new Budget
Construct a new household budget that fits the new income reality. Pull your bank statements or credit card bills and segregate your expenses into those that are necessary or discretionary. Optimize discretionary expenses by figuring out what you can and can’t do without. It’s easier to slash it across the board – by say 10-20 percent. If rent costs of your home are higher, move to a cheaper place.
Keep Investing and Repaying
Don’t short-change your long-term financial goals by stopping to. If you were saving 20 percent of your income for , continue to do so. On a reduced pay cheque, it will obviously mean lesser than before. However, try to match it in absolute terms, if possible. Automate the process so that you don’t have any second thoughts.
If there is debt, continue to repay it on time. It will help you borrow at cheaper rates in the future. Moreover, keepin yourself through training and certifications that could build your talent and enhance your career prospects.
Look for ways to maximize your pay cheque by making it more tax-efficient. Pay cuts are also an opportune time to negotiate a better work-life balance with your boss. Look at negotiating fewer hours or fewer work days or perhaps work remotely from home for some days.
When pay cuts are not bad
Pay cut need not be always detested, especially if you are joining the workforce after a break. In such cases, it is likely that employer might not match or improve on your last drawn salary. Moreover, pay cut is usual if you are changing careers and taking a new type of work without relevant experience.
Pay cuts are not something anyone looks forward to. However, you need to inculcate financial discipline to live within your means. If it does come your way.