With the overall economy tanking, and very sharply in many specific industries, some companies are turning to an alternative when everyone but the critical personnel has been laid off – pay cuts.
A company-wide pay cut has the potential to save a large number of individual jobs at the “expense” of the many. As an example, for every ten people in the company, a 20% pay cut will essentially make the salary of about two people “disappear” from the payroll burden.
For a 100-person company, that means not having to lay off 20 people. Rather substantial, don’t you think?
It’s a bit of a simplified analysis, but you can see why it’s done. When you’ve already laid off 50-75% of your workforce, and will have problems operating at staff levels any lower than you have now, pay cuts are one of the only alternatives to throwing in the towel.
What Can You Do?
Pay cuts can be as shocking to some as getting laid off, simply because we have gotten accustomed to a certain level of income. But it’s important to make a point here that I’ve also made to some of the people I know who have received pay cuts:
80 or 90 percent of your salary is still much better than 0 percent.
Here are ways you can make small adjustments to deal with reduced income:
- Revisit your budget and cut out fluff. If you don’t have a budget, this would be a good point to start one. If you’re already running a successful budget, chances are a lot of “fluff” has crept up and started eating away at the space between your “needs” and your full income. Determine your priorities and cut in accordance with the amount of your reduced pay.
- Implement cost-saving methods. There’s nothing better than surfing around financial blogs for finding ideas on frugality and cost-cutting in every area of your budget. Start with my blogroll and you’ll find ways of looking at expenses you had never considered.
- Review every monthly payment. You know which ones I’m talking about – payments of just $9.99/month or $14.99/month for a magazine membership, an online service, movie service, or the gym. Some of these are very important and worth keeping, but many we keep around because it’s more convenient than calling and cancelling. If you haven’t used something in three months, or it’s not a critical part of your day-to-day life (except maybe a few things for entertainment), get rid of it.
- Find alternative income sources. A hobby can easily turn into a small income-producing operation with some effort and things you’re already doing for fun. You can also sell things you no longer need on eBay and make quite a bit of extra cash. Find other ways by keeping your eyes and ears open and putting yourself in the mindset of searching for opportunities. And remember that you’re not trying to replace your main source of income, just supplement it. Focus on keeping your job as priority #1.
- Make sacrifices when it comes to wants. I don’t have to tell you that when it comes to the difference between wants and needs, there is a fuzzy line that is hard to spot within many people’s budgets. Consider your lowered income as motivation to prioritze and determine what you truly value.
- Consider the “big” burdens – housing and transportation. While you can trim and pluck at a budget all day long, when it comes to big changes, like those needed after a severe income cut, these big-budget items will get you a long way. Consider how much you’ll save if you move to a smaller place, or sell off one of your vehicles and learn to carpool.
- As a last resort, lower savings & retirement contributions. This is not a recommendation, but it is a last resort. If you can’t make your day-to-day expenses and you’ve truly cut everything from your budget, it makes sense to temporarily stop contributing to your retirement plans. But don’t be tempted to start taking money out!
With a little bit of finesse and an honest evaluation of your priorities, goals, and current status, you can effectively handle the financial side of a pay cut without a lot of stress!
Be sure to take care of your emotional side as well, and don’t let this setback keep you back from achieving your overall financial and career goals!
- Kate at The Paycheck Chronicles has featured my article on using a monthly report as a means of communicating about money with your spouse.
- Wide Open Wallet hosted the 198th Carnival of Personal Finance this week. My post on the monthly report was featured in the Editor’s Picks! Thanks to Ashley for putting together the carnival.