There was a time when employees were virtually guaranteed a raise each and every year. Even poor employees typically got a raise that kept pace with the rate of inflation. This is no longer the case. As the budget cutbacks in Wisconsin have proven, any employee may be asked to take a pay cut. Since you never know exactly when you are going to be forced to take a salary reduction, you need to prepare your finances just in case. Here are a few tips that will help you prepare for a potential cutback.
Overstock your emergency fund
Most people will tell you to keep approximately 3 months of living expenses in your emergency savings. That may work during normal economic circumstances, but not today. You should stock your emergency savings account with at least a full year’s worth of salary. You never know what financial emergencies will arise and you want to make sure that you have enough money to survive a life changing situation.
Update your resume
Now is as good a time as any to start updating your resume. Don’t wait until you are in a negative situation to start updating your resume. The best time to start looking for a new job is while you still have your old job. Start updating your resume with newer job titles, job descriptions, educational, and contact information. Most employees can tell when they are about to either lose their job or be forced to take a cutback. You should prepare yourself in advance.
Shop your services
Just because your current employer is asking you to take a pay reduction does not mean that all employers would ask for the same thing. Start visiting sites like Monster and Careerbuilder to see what opportunities exist in your career field. You may be surprised to learn that other companies are willing to offer you a salary increase at a time your employer is asking you to take a cut.
Start reducing your expenses
One of the best ways to deal with a salary cutback is to eliminate some of the luxuries in your life. Try to shave the exact amount of expenses out of your budget equal to your salary reduction. Small adjustments to your entertainment and shopping budget might just allow you to adjust to a temporary salary setback without ever really feeling it.
Know your rights
It is perfectly acceptable for an employer to ask an employee to take a salary reduction. It is also just as acceptable for an employee to turn down this request. If you have a contract with the employer then they may not be able to legally lower your salary without your permission. You can often negotiate for extra perks in order to accept a reduction in income. You may be able to get more paid leave time, additional vacation days, or an increased bonus. You could ask for the option to telecommute as well.
Dealing with a salary reduction is difficult enough. Make sure that you follow these tips so that you are prepared.
So, have you ever been in this kind of situation? What have you found helpful?
I think if you faced a salary cutback the #1 thing you do is cut back on expenses.
If we lost 1/2 our income, we’d re-consider how much extra we pay on the mortgage (currently about 35% every two week) and how much we saving in RRSP and TFSA (about 35% of our take home). Then we’d trim down the food budget and definitely trim down the tv/phone/internet. Once you’ve done this you have a real idea of what your real expenses are.
At that point you can figure out how much savings you need.
Now, I disagree w/ Miss T here. I think 1 yr of expenses saved is not a smart way to deal with your money. Even in the best high interest accounts you are barely making up for inflation and you may even be losing money … I think it is wiser to keep back enough money for a disaster (e.g. new roof). Unless you have concern your job will disappear I suppose.
@SPF Like my post said, cutting your expenses is key to freeing up some money. Sounds like you two have a good plan in place if this situation happens to you. The reason I mentioned saving for a full year is because you don’t always know how long you will be out of work or what other financial situations may change. A year’s worth of expenses will give you plenty of time to get back on your feet or to hunt for a job. Some people are really specialized and when their jobs are deleted it can take a really long time to find something else. You can still put a year’s worth of expenses into a TFSA and gain some interest on it. That’s what we are doing for my future maternity leave.
I went through the salary cut back and it was tough. I reduced my 401K contribution just to get some extra cash. We cut down on a lot of things: cable, cell phone plan, cancelled gym memberships, started getting movies at a local library. It did help a lot. I regret reducing 401K, but it was a necessary step for us.
@ Aloysa Well the good thing is you cut back on the non-essential expenses you could. Yes it sucks that you had to dip into your 401K but you did what you needed to do to avoid getting into debt. Question: Did you resume paying for those non-essential services after things got better or have you kept them out of your budget? It is amazing what we can live without once we try.