Remain Calm: How To Reset Your Budget After a Pay Cut Without Spiraling
With the economy being tough — and the job market remaining more difficult than it had been prior to the pandemic (as reported by Fast Company), even though numbers seem to be stabilizing — questions tied to personal finance during periods of economic hardship continue to proliferate.
Taking a pay cut is usually never ideal, although some may opt to voluntarily do so for their own individual reasons. Whether you’ve lost your job, opted for a lower-paying alternative, saw your hours or salary trimmed or had to switch gears into a less lucrative position, the question of how exactly to adjust your spending to without spiraling comes into focus.
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That very question was raised by a user on Reddit and although the original post was deleted, the math behind their budget was heavily analyzed by peers. It could be worthwhile dragging some of the more notable suggestions into the limelight while also consulting the tried-and-true wisdom put forth by more notable money experts. Here's how to reset your budget after a pay cut.
Create a ‘Zero-Based’ Budget and Find Your New Income Floor
First thing’s first: Do whatever it takes to reach a net positive income at the end of each and every month. The top-rated reply (with a whopping 1,600-plus upvotes) closed out their remarks with this advice, backed by Dave Ramsey himself.
Ramsey, when discussing fluctuating or uncertain income situations, strongly advised in a Ramsey Solutions article to establish a “zero-based budget” — this means that every single dollar of income has a job before the month even begins. The Four Walls — that is food, housing, transportation and utilities — come before anything else. It’s also important to establish an “income floor” that’s realistic and to build your budget out based upon this worst-case scenario so that everything above that income threshold feels like a win.
The second step, echoed both by Ramsey and the top-rated reply, is to absolutely slash every bit of non-essential discretionary purchases to their minimum. That means finding the most cost-effective phone plan, opting out of streaming services or cable subscriptions and tackling the grocery budget with a red pen (and a meal plan and a vacuum sealer) at the ready.
Contact Your Landlord or Mortgage Servicer (and Any Other Major Bills) in Advance
If your pay cut is substantial enough to affect your rent, mortgage payments or other bills — now is the time to be proactive on this front rather than reactive. The Consumer Financial Protection Bureau (CFPB) provides extensive resources for doing so, including guides as to how best contact a mortgage servicer, negotiate with your landlord or speak to a HUD-certified housing counselor.
Don’t Ignore the Emotional Toll Attached to a Serious Pay Cut
Finally, Lindsay Mott of HerMoney spoke to the emotional toll that can result from a pay cut. Her advice? Take the time to process the trauma tied to this event before moving forward with any concrete plans.
Mott cited Lili Vasileff of Wealth Protection Management on the subject.
“There needs to be a window of time where people really digest what they’ve been through. This is stepping into a new world. You’re testing yourself and you’re testing the waters,” Vasileff said.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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