Written by: Corey Janoff
Many of you have had to endure a pay cut in 2020. Many of you have even been furloughed temporarily or laid off. While most of the people who read this blog work in healthcare, which is rumored to be “recession-proof,” 2020 has proved that even the most stable jobs aren’t 100% waterproof. Who knows what will happen to our world and economy the rest of this year, or in years to come? Today we want to write about ways to survive a pay cut so you can be prepared if you are ever faced with those circumstances.
With that, let’s take a look at 7 ways you survive a pay cut. Start implementing them now, so you aren’t scrambling if it happens to you.
1. Live Below Your Means
One of the most basic rules of financial planning is to live below your means. If you want to achieve your financial goals and achieve financial independence, spend less than you earn. Spending less than you earn and living below your means will give you the utmost flexibility if you are faced with a pay cut.
Hopefully any pay cuts you do experience won’t be terribly extreme (ie, 50%). If you are bringing in $20,000/month after-taxes, but you only spend $10,000 on living expenses, you have quite the buffer if your income goes down. Your income could be cut in half without having to make lifestyle changes.
If this scenario does play out, you might need to revise some of your financial goals, as the excess money that wasn’t going towards your living expenses was likely being saved, invested, or used to pay down debts faster than required. However, you will be in the fortunate position to make those decisions without being under financial duress.
If we have to revise some of our goals, so be it. Maybe we won’t be on track to retire quite as early as we would like, or take quite as many international vacations. We’ll still be able to achieve most of our financial goals in a timely manner.
2.Maintain a Healthy Emergency Reserve Fund
2020 brought us another harsh reminder of the importance of having an emergency reserve fund. This holds true for both your personal finances and your business, if you own a business. Many dental practices and medical specialists were forced to close their doors for multiple months in the spring of 2020. As I type this on July 17th, 2020, many states are looking at re-imposing some of those same restrictions again after reopening hasn’t gone as well as hoped.
Those who had a healthy emergency reserve account of at least three to six months of expenses saved up were able to weather that storm. Those who didn’t have sufficient cash on hand were forced to make tough decisions.
Do I have to rack up a high interest credit card debt to pay your bills? Take out a personal loan? How can I get a personal loan if I’m not working? Banks have tightened their lending standards lately.
If you own a busines, do you lay off your employees, hoping they will return when cashflow is positive? Do you try to sell assets? Close altogether and go be an employee somewhere?
If you have enough cash in the bank, you can supplement your reduction in income and pay any unexpected expenses that pop up with minimal worry.
3. Moonlight or Pick up Extra Shifts
How bad do you want it? Are you willing to sacrifice for what you want? If not, what you want becomes the sacrifice. If you want to maintain the same lifestyle and the same financial goals, but your income has taken a hit, work more.
For some, this is easier to do than others. If working more is not a viable option, see the other six ideas in this post. Some people can pick up extra shifts or moonlight whenever they want to. If that is an option for you and money is paramount, I would strongly consider it.
If your pay was cut by $2,000/month, and you can earn $1,000 per shift, pick up an extra two shifts a month. Most of you only work four days a week anyways (plus some call here and there). Work two extra Fridays, or come in twice on a weekend each month and you have closed your income gap.
I completely understand that time is a limited resource and many of you have families. Many of you have young children and your spouse needs all the help he or she can get. You leaving to go work more, may cause even more stress on the family than the income gap. If I told my wife I needed to work more as a way to survive a pay cut, she would tell me to first stop buying wine and bourbon (or even start selling our wine).
I totally get it. But, if working more is an option, it’s a good option to consider to survive a pay cut.
4. Have a Side Hustle
Side hustles for doctors (and in general) have become increasingly popular in recent years. If you have a supplemental source of income, that can only help your bottom line. This is kind of the same thing as picking up extra shifts in the previous section, but not entirely.
Some side hustles take time to build into a meaningful income stream. Others are not quite possible during a global health pandemic. That is where you need to use that thing between your ears and figure out something you are good at that is feasible and can bring in some extra cash.
5. Pause College Savings Contributions
If you look at the order of operations on my list here, you’ll notice a trend. The first tips I have for ways to survive a pay cut involve prudent financial planning – living below your means and maintaining a healthy emergency reserve fund. These are proactive and preventive measures that everyone can take.
The next tips involve boosting income by working more or working harder. If you can’t outsmart ‘em, beat ‘em with grit and determination.
These next two tips involve reducing deposits that are earmarked for financial goals. Ideally, we employ the first four strategies, before resorting to sabotaging our financial goals (even if it is temporary). However, if this a matter of survival, we must consider all options.
Pausing college contributions would be one of the first goals I would consider sacrificing if we have to resort to it. Why college contributions? College savings isn’t mandatory. If you don’t save a dime for your children’s college education, they can still attend college. They may need to work harder for scholarships, take out loans, or attend a less expensive school and do a work study program. Regardless, there are still options for them to get the education.
Most people will stop saving for their financial goals immediately after they get notice of a pay cut. If you want to achieve financial success, you need to go against the grain and behave differently than the average person. While pausing contributions to your kids’ college accounts is very much an option to help survive a pay cut, consider some of the other choices mentioned previously first.
6. Pause Retirement Contributions
While reducing or even stopping contributions to retirement accounts altogether is very much an option, this would be one of the last things I would recommend doing. While you may be young and think you will have plenty of time to make up the difference, you’ll have quite the uphill climb to the finish line if the stoppage is prolonged. Saving for retirement is like biking across the country – there are many routes you can take, but grinding when you’re older is probably the least ideal.
The reason why I place reducing retirement contributions after college savings is because unlike college, you can’t take out loans or get scholarships for retirement.
So, consider pausing retirement contributions as a way to survive a pay cut if you must, but consider it a last resort.
7. Sell a Kidney (Just Kidding)
Get creative. I suppose you could sell a kidney on the black market if you want to, but I am not recommending that.
What things do you have in life that you don’t need? Your $1,000/month car loan could be sold and you pay $5k cash for a 12 year old reliable vehicle with no frills.
Do you own a vacation home? How often do you go there? Maybe you sell it and rent a place when you visit instead.
Are your kids in private school at $20k/year per head? How do you feel about paying $20,000 for first grade via Zoom? Maybe we consider the public school option until your income is back to its pre-pay cut level. I’m not anti-private school – I attended both private and public schools back in the day (I say that as if I’m so old and had to walk uphill in snow both ways to get there and back).
It’s time to have some tough conversations about money and what is important to you. There is no right or wrong answer.
As Americans, we tend to like things in excess. We don’t need all these things, we just think we enjoy having them. Like multiple kidneys, we could probably scale back and cut out some of the things we don’t need.
What Ways Will YOU Survive a Pay Cut?
I hope this gives you some ideas for ways to survive a pay cut if you are faced with such a predicament. If you are fortunate enough to still be operating at full income, consider living below your means and maintaining an adequate emergency reserve fund so you don’t have to resort to the other options if you don’t have to.
For tips on how to best approach this for your specific financial situation, meet with one of our advisors to discuss!