How to Make the Most of a Reduced Paycheck
Countless Americans are earning considerably less than they used to—and struggling to keep up with expenses. A wide range of circumstances can boomerang personal income back to where it started. Bubbles burst, the economy falters, companies downsize, and personal disasters happen. Perpetual salary growth—or even maintenance - is simply not guaranteed. However, by adopting the right tools and attitude, you can make the most of a reduced paycheck—and not just survive, but thrive.
Determine whether your situation is temporary or permanent
If you fully expect to be back in the CEO's chair soon, you may only have to adjust to lessened cash flow for a limited time. But before you tap into your reserves (and retirement savings, home equity, cash value life insurance, etc.) it would be wise to behave as if the salary depreciation is lasting. Though both your gut and your resume may assure that a six figure income is just around the corner, you can't know for certain until you are negotiating the fine points of your defined benefit plan. Cut down on spending now. Securing that job may be harder and take longer than you think.
If you never expect to make as much money as you once did, you may be experiencing anxiety and depression—normal emotions are not easily shrugged off. There are practical matters to contend with as well, (such as how you will pay your bills) which can send you into panic mode. Adopting a systematic approach of simply doing what you can will take you far.
Recognize that your salary is not you
This is a deceptively obvious statement. Of course your salary is not you. But many people's self esteem directly corresponds with how much money they make—the higher the income, the more important they feel. If your mood declines when your income drops, make every effort to dispel the attitude that financial wealth equals worth. It does not, nor does having an abundance of money guarantee happiness. Think back to when you were making more money then you do now. Were you genuinely happier, or did you just have the ability to buy more?
Seize the day
Hardship can hone skills and challenge entrenched ideas. Perhaps you worked in the high-tech field because the money was good, but that is not where your passion (or even perhaps talent) truly is. Consider this your opportunity to discover what you really want out of life. After all, if you are going to dedicate forty or more hours a week to your job, it should be something you love. Or at least like.
If you are currently unemployed or are working fewer hours, use this "extra" time wisely. Your options are as varied and abundant as your desires. Consider taking a class—one that will boost future earning potential (to where it was or even beyond) or for pure pleasure. Write that book, paint the kitchen, start an exercise routine. Or just relax. Chances are, at the end of many a grueling day at your former highly paid yet high-stress job, you said to yourself through gritted teeth "All I want to do is lay down on the couch, TV on, shoes off and do nothing." Well now you can. Enjoy this time; it may not last forever.
Analyze your expenses and value system
When cash is copious, it is easy to spend arbitrarily. However, when the salary that sustained such a lifestyle is gone or drastically reduced, its time to take a good strong look at what you need to spend your money on, not what you can. Prioritize expenses now, and identify which bills take precedence. Mortgage versus car payment? Credit cards versus utilities? Analyze the ramifications of missing or not paying each. If you need help deciding, contact an expert. CCCS-SF/Balance provides free financial coaching and appointments can be conducted over the telephone at a time and date that works for you.
Develop a spending plan. It will help you to discern between those expenses you can and cannot live without. If you find there is simply not enough money to support your necessities, much less your desires, at the very least you now know how much you will require from your next job. If expensive (and expensed) dinners are now a thing of the past, relish in the delights of a cheap pizza, or making cold cuts stretch with lots of lettuce. Enjoy and appreciate the things you may have begun to take for granted.
Remember: credit is not supplementary income
When money is tight, credit cards can take on an unusually seductive glow. However, a $40,000 line of credit is not a bonus in disguise, no matter how you much you wish it was. If you use credit to maintain the lifestyle you've grown accustomed to, it won't be long before you "hit the wall”. Without an income to support repaying the balance in full every month, you'll be paying in installments. Interest rates are commonly in the high teens, and if you fall behind by 60 days, they will likely skyrocket. Late and over limit fees (if opted in) will add to an increasingly daunting balance. And soon you'll be wishing you could return all the merchandise you bought and the meals you ate just so you don't have to open another statement and look at those big, scary numbers. Credit cards are not designed to be emergency savings accounts.
Develop a plan
To thwart procrastination, write down what you want to achieve during this time. Be specific: include names of people you need to speak to and proposed accomplishment dates for each task. Update and refer to it regularly. Apathy's enemy is a detailed and well-thought-out plan.
Get professional assistance, talk to friends, and find others who are in like circumstances. It is too easy to think you are alone in this—support is key. Vent to those who can empathize; ask for help from those who can assist. Shock, shame, and anger are normal and feeling these emotions is expected. But by adopting a positive attitude and taking pragmatic steps, you can adapt to a reduced income, and achieve a financially stable future.
Revised January 2016.