5 Must-Dos if You're Taking a Pay Cut
The good news: You’ve found your dream job. The bad: You’ve also found out that living the dream every day means that you’re going to have to live on a whole lot less.
Unfortunately, not all great career moves come with a great salary—if you’re taking a position at a startup or nonprofit or starting your own business, for example. And, while taking a pay cut can be totally worth it to pursue your dreams, it’s going to take some reassessing (and, well, overhauling) of your budget.
But unlike when you’re out of work for a couple of months or temporarily short on cash, the financial changes you make to adjust to a lower salary will need to be sustainable over the long haul, and you’re still going to need to plan for your long-term monetary goals. Here’s what you need to know about living on less.
1. Decide Where to Scrimp
You’ve heard it before, but the best place to start is by identifying your unnecessary expenditures. I promise—you’ll be surprised by how much you can live without!
Pull out your monthly checking account statements and credit card bills, and highlight anything “extra.” Depending on your priorities, that could include magazine subscriptions, gym memberships, a Rhapsody account you never use, or a habit of eating out.
You don’t have to cut these out entirely—just consider cheaper substitutions. Can you DIY your bi-weekly pedicure? Or hand wash your clothes rather than having them dry cleaned? Even simply brewing your own coffee can chop the costs of your caffeine fix significantly.
2. Renegotiate Necessities
You can’t exactly eliminate your rent and food expenses, but you can look into less costly options. If you live by yourself, consider taking on a roommate to share the rent, or moving to a smaller place and putting some of your stuff in storage.
When it comes to utilities, you have to keep the lights on and the water running, but your utility companies may offer hardship scholarships or reduced rates for low-income earners. You can scale back your Internet package (or split the bill with your neighbors and share the password). Get a Netflix or HuluPlus subscription, and you might not even need cable. It might be difficult to switch your phone plan in the middle of your contract, but when your term expires, you can ask a relative if she’d let you hop on her plan as an extra line and share the cost.
And when it comes to groceries, rethink your weekly jaunts to Whole Foods, and try buying in bulk to save yourself some dough.
3. Don’t Miss Your Payments
Whatever you do, don’t fall behind on your credit card bills. It’s okay to pay just the minimum as you adjust to your lower salary, but don’t be late—you’ll take a hit to your credit score. (35% of your credit score is based on your payment history.) And the less income you have, the higher you want your credit score to be so that you can still qualify for great interest rates on loans for your home, car, and lines of credit.
If you have student loans, look into consolidating, which may lower your monthly payments up to 34%. But be careful—it will also stretch out your payment period which adds interest in the long run. If it’s absolutely necessary, you can consider applying for deferment to both stop payments and interest from accruing for a period of time.
4. Keep Saving!
One of the biggest mistakes that people make when they’re cutting back is that they stop saving. But even if it’s just a little bit, continue to set aside money in your savings account. (I know the interest rates are awful now, but a penny saved is a penny earned!) By keeping an emergency fund, you will limit your likelihood of taking out another line of credit (with interest to pay back) and prevent any uncomfortable borrowing from your friends or family. It’ll also keep you in the habit of saving for the future, and protect you from the possibility of an even rainier day.
5. Plan for Retirement
In addition to keeping an emergency fund, you should also keep planning for retirement. If you had a 401(k) with your former employer, but not with your new one, you’ll have to move into your own retirement vehicle. I recommend opening a Roth IRA if you’re young (in financial terms, that means under 40). This will give you more flexibility with your investments, which can be a combination of stocks, bonds, mutual funds, CDs, and even real estate.
In most cases, you can easily roll over your company’s retirement vehicle, but you should do this before you leave. Many plan administrators have a “no conversion to Roth IRA” rule, which won’t let you convert—unless you already had a Roth set up before leaving. (This “no conversion” rule was supposed to be eliminated in 2010, but some companies still offer it on a voluntary basis).
Contribute just $30 a month (a mere $1 per day) until you can afford to do more. While yes, that’s a chunk out of your monthly budget, you’ll feel good knowing that you’re contributing to a nice nest egg for retirement.
Money isn’t everything when it comes to job satisfaction—which means that, as you pursue the things that do make you happy, there may be times when you need to cut your cash flow. But know that you can cut back, renegotiate some expenses, and still have room to save—and feel confident in yourself as you transition into your dream job.
Photo of woman budgeting courtesy of Shutterstock.
About The Author
Kristen is a budgeting guru who loves to save money more than she loves to spend money! Her friends call her thrifty, but she knows she has all the right money moves. After studying abroad and seeing how little others live on and taking a job working with poor communities’ financial needs, she realized how important financial decisions are for young people to start making now. Tune in to her column to see how you too can be a money maker!