Dealing with a drastic reduction of income can be difficult. I know. My wife recently changed jobs, and in doing so we took a reduction in pay of almost $20,000 per year after taxes. Yes, that is a lot of money, but thankfully we planned this over a year in advance and were prepared for it.
Unfortunately, most people can’t afford to take a large pay cut, especially when it is unexpected. That is why I am writing this article – to help others if they fall into a similar situation, whether it is planned or not.
Here are the steps I recommend to those with a drastic decrease in income:
Don’t Panic – analyze your new financial situation: Panicking will not solve the problem. Instead, ask yourself how much money are you now bringing in? Did any new expenses arise, such as loss of employer provided housing, food, or health care? Are you saving money now with lower commuting, eating out, or day care costs?
Update your budget based on your new situation: If your new income still covers your expenses, you might be just fine. If it does not cover your expenses, or is extremely close, you will need to look for ways to trim expenses from your budget. Here are some tips to help you out:
- Separate wants from needs: You need shelter, food, health insurance, and some form of transportation. You do not need a mansion, steak and lobster for dinner, or a $400/mo. vehicle payment. Before you buy something, ask yourself if you really need it, or if you want it?
- Cut expenses and save money: Use coupons, buy items on sale, change your thermostat setting to save energy costs, combine trips to save gas, reuse or repair items instead of buying new, buy generic items when appropriate, and consider canceling subscriptions such as cable, Netflix, and magazines. There are many other ways to trim costs from your budget.
- Talk to your creditors: Your creditors may grant you an extension on certain loans, or possibly reduce your interest rates. It never hurts to ask.
Look for other sources of income: If you need to take a lower paying job, or even one or more part time jobs to make ends meet – do it. You can also earn money by selling unused items on eBay or Craigslist. At this point, earning some money is better than earning none at all. Other sources of help:
- Network: Talk to family, friends, former coworkers, etc. They may know of current job openings or may be willing to act as a reference if you apply for another job. Connect with people in LinkedIn. Your family and friends may also know of other ways that can help you in your new situation.
- Update Your Resume and begin a job search: Make sure your resume reflects your current skills and your past and current duties. You can look for a job through your network, local temp agencies, job fairs, classified ads, and on-line job search engines such as Career Builder, Yahoo Jobs, Monster, etc. Job searching is almost a full-time job, so be patient and put forth your best effort.
- Tap your emergency fund if necessary: Everyone needs an emergency fund, and a sudden decrease in income is a good reason why. Keep in mind, an emergency fund should be used for emergencies, and not to maintain a standard of living above your new means. Food, housing, medical insurance, or new brakes for your car qualify as expenses you should use your emergency fund on. Cable, or a new Prada purse – no.
Look to others for help: There is no shame in asking for help when you need it. Again, your network of family and friends may be able to help you through this time. Beyond friends and family, there are other places you can go:
- Social services: You may be eligible for unemployment, welfare, food stamps, Medicaid, or other services. These may not be enough to live on, but they should help you bridge the gap. The rules for many of these social services vary by state, so I recommend checking with your state for more details.
- Visit your church: Many churches have food pantries and other services to help people through hard times. Your local church leaders will welcome you with open arms.
Keep your spirits up: Dealing with unemployment or a decrease in income can be very stressful. I have gone through a period of unemployment, and it is not easy. Thankfully I had wonderful family and friends who were supportive. Again, this is where reaching out to your network and church can make all the difference in the world.
If you are not able to prepare in advance for a drastic drop in income, I hope this guide will help you to better deal with your new situation.