7 Rules for Dealing With a Pay Cut

We want to make more money in our careers, not less. Unfortunately, there may be instances where you have to deal with a pay cut. Your job may have to cut wages to stay in business, your commission may be lower, your own business may suffer a loss of revenue, or you could decide to take a job that pays less money. Dealing with a pay cut is far less than ideal, but navigating the reduction in wages is critical to staying afloat financially.

Know your new income. Estimate the extent of your pay cut as much as possible. Predicting your new income will help you make the best decisions for your finances moving forward.

Readjust your budget to reflect your new income. Don’t try to mentally manage your expenses; it's too easy to make a mistake. Update your budget to include your new income estimate. If you don't have a budget already, this is the perfect time to create one. If your spouse or partner also has income, work together to figure out what your new household budget should look like.

Reduce your spending. This is one of the most important steps to take after a pay cut, even if you anticipate the pay cut to be temporary. Spending at the same level as your higher income will create cash flow problems that will worsen with time. Review your spending habits to figure out the best expenses to get rid of. Food, clothing, and entertainment are some of the quickest and easiest expenses to reduce.

Supplement with savings. A potential loss of income is precisely why you’ve worked so hard to build an emergency fund all these months. Use your savings to help make up the difference in your income and expenses, but only after you’ve cut out extra, unnecessary spending. Spend as little of your savings as possible because you never know how long your savings will have to last. You’ll need to rely on your savings if there’s a true financial emergency.

Stay current on your payments. You may be tempted to skip some bills to pay others, but this decision only makes it harder to manage your finances. When you miss a payment, you’ll have to deal with late fees, a higher minimum payment, and damage to your credit history. Before you skip a payment, call the company to find out if you can make a payment arrangement on the bill or temporarily suspend payment until you can get back on your feet.

Don’t rely on debt to get you through. It's easy to turn to credit cards or loans if you don’t have savings or you want to hold on to your savings as much as possible. However, using debt to supplement your income is risky. As your debt increases, so do your monthly payments, putting even more stress on your already strained income. It’s better to put your credit cards away until you can afford to pay them.

Make extra money. If you can find a way to make up the loss of income, you may not have to cut your expenses as much. Taking on a part-time job or picking up a money-making hobby can save your finances. Don’t wait until you’re in a financial bind to make this move. The sooner you act, the less financial stress you’ll have to endure.