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Live on Less Income – Give Yourself a Voluntary Paycut

by Ryan Guina

My wife and I just took a large salary decrease – to the tune of about $20,000 per year after taxes. We did this voluntarily, because for us, our quality of life was more important than the money we were earning. We were able to afford this big pay cut because a year ago we gave ourselves a “voluntary pay cut.” We knew we would be earning less money within the year and we committed ourselves to spending much less than we were earning. Doing this allowed us to focus our “extra” money toward preparing for this salary decrease.

Personal finance blogger No Credit Needed recently asked his readers:

What would happen if your boss came into your office tomorrow morning, and told you that your salary had been reduced by 15%? Furthermore, what if he told you that a new law had been passed and you couldn’t change jobs for one full year – and you couldn’t borrow any money, for any reason?

What would you do?

This was very similar to the situation we faced, only our boss didn’t tell us we had a reduction in pay coming, we made this decision based on our desire to spend more time together as a couple.

Some people would have a very difficult time adjusting to a 15% (or other) decrease in pay, but many would find a way to be successful. NCN asked this question to get people thinking about how much they spend vs. how much they really need to spend. Spending less than you earn is one of the best financial moves you can make.

The benefits of giving yourself a voluntary pay cut:

  • Change Your Financial Habits. If money is there, most people will spend it. Once you get in the habit of having less to spend, you will spend less. From personal experience, it is much easier to make this transition gradually instead of being forced to make this transition, but it can still be done.
  • Financial Cushion. If a decrease in pay actually occurs and becomes permanent, you will have already been living on less money. Hopefully, there will not be much of an adjustment necessary to meet your financial obligations.
  • Extra Money. At the end of the month there is something left over. You can use this money to build an emergency fund, reduce debt, invest, or save for a large purchase such as a new(er) car, a vacation, college tuition, etc. Before my wife and I took this voluntary pay cut, we used our “extra” money to get rid of all consumer debt. After the debt was gone we invested our “extra” monthly income.
  • Peace of mind. You won’t worry from month to month about whether or not you have enough money to pay the bills, or if your checks will clear. You already know the answer is yes. And that is a beautiful feeling.
  • Options. When you pay down most or all of your bills and have a sizable emergency fund, you feel less trapped in your current job. My wife and I were able to choose employment that offered us better hours and less stress because we were able to afford to do it. We weren’t forced to stay in an unpleasant work environment because we needed the money.

Sounds great doesn’t it? Now, how do you do it?

How to live on less than you earn:

  • Analyze Current Expenses: Track your expenditures for a month or two to determine where you are spending money. You might be surprised at how quickly those “inexpensive” lunches and other things add up. It should be easy to find a few ways to save money once you take a deep look into your budget.
  • Cut unnecessary expenses. You know where your money is going – now cut out those little things that you don’t need to spend money on. Chances are, there are many things you are spending money on that you don’t need.
  • Make a budget and stick to it. Once you know you income and expenses and have cut unnecessary expenses, you can now make a budget. To live on less than you earn, don’t use 100% of your income as your starting pay. Instead, pick another number such as 85% or 90%. Base your budget from this income, stick to it, and you will be on your way to living on less than your income.
  • Automate. Place bills and savings on automatic bill pay. Placing all your bills in one location makes it easier to organize them and see how much you are spending. This equals less worry and fewer hassles. Another benefit: you will not be tempted to spend your investment or debt repayment money on something frivolous if you never touch it.
  • Be creative. Save money by bringing your lunch to work, carpooling, making gifts instead of buying gifts, or other creative methods. There are hundreds of ways to be more frugal and save money.

Giving ourselves a voluntary pay cut was one of the best financial moves my wife and I have made as a married couple. Doing so gave us to the opportunity to spend more time together, plan for family get-togethers and holidays, and enjoy ourselves more. My wife and I were only able to do this because we gave ourselves a voluntary pay cut over a year ago and planned this reduction in income. And you know what? We don’t feel as though we have deprived ourselves in any way. In fact, we have less stress and are happier.

Note: This article was inspired by the article: Give Yourself a (Pretend) Paycut, which was featured on personal finance blog No Credit Needed. This article is part of a series NCN is currently writing – 33 Days and 33 Ways to Save Money and Reduce Debt. There is a lot of other great information in this series!


Published or updated December 8, 2010.
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{ 8 comments… read them below or add one }

1 Mark from Smart Investing & Money Management

It’s usually much easier to learn how to spend more money. Excellent points on how to learn to live on less.

-Mark

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2 Mark McGuire

So true, especially if you have no debt, what is holding you back?

I have been able to simply resign from my previous employers who “assumed” I would be working for them forever but never recognized my efforts.

With no debt and living below my means, I was easily able to move on and find new employment every time, usually within 2 weeks.

Reply

3 Ryan

Mark from Smart Investing,

I’m glad you like the tips. And actually as far as spending less money goes, I have found that once we cut out a lot of little things, we really didn’t miss them. In my opinion, we aren’t “doing without” anything that we need. And we are much happier!

Mark McGuire,

We still have our mortgage, but that was not enough to hold us back from doing this. Ultimately, not having any consumer debt gave us the freedom to take a lower paying job in exchange for better hours and more time together. We are fortunate to be in this position.

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4 Thrifty Penny

This is a great hypothetical situation! My creativity is working overtime to combat the situation. Great post!

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5 Ryan

I’m glad you enjoyed it. If you haven’t read NCN’s post, I recommend it as well – that was the inspiration for this post.

Working this situation out on paper (or at the minimum, in your mind) is a great way to try and realize how you would be affected by an income change. Doing this in real life is a great way to get ahead! :)

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6 Jeff

I think this is pretty solid advice. I started this a couple months ago. I am working on building an emergency account right now, and once I get that built up, I will start putting the extra money into retirement funds.

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7 Kerena

For me, it wasn’t voluntary. We got the notice in our paychecks that we will have to take a severe cutback in hours in order for our employer to stay afloat. I have been thinking about and working towards downsizing mywork hours for a while now in order to spend more time with aging loved ones. My boss saw it as having to put people on unemployment until things improved – I see it as a chance to live.

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8 Ryan

Kerena, you’ve got a great attitude toward this situation. I wish you, your family, and your company the best!

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