 |
Whether you are a Democrat or a Republican, Independent or Green, Hippie or [whatever the opposite of hippie is], you just got a pay cut. Starting January 1, you lost 2% of your pay back to Social Security taxes. Did you notice? If you’re like most Americans, you surely did, because your insurance premium probably went up for the new year and any other little deductions to your paycheck before you get to take it home went into effect for you as well. Most Americans noticed it BIG TIME. So what happened and how do you deal with a pay cut?
No matter your political affiliation, you likely would agree that our government can’t manage money very well. It claimed that it needed more revenue to make the country operate and debates ensued over the best way to squeeze it out of us. Ultimately, even though we were promised the “average American” wouldn’t have their taxes raised, when we approached the “fiscal cliff” (Chicken Little – “the sky is falling”), the government decided it would rather bicker and argue (and even consider giving itself a raise – thankfully they didn’t vote it in) than to take care of the core issue. The result that most of us noticed? A 2% Social Security tax break that was instated in 2011 expired. Simply put, the government didn’t “raise our taxes” – they just let them go up on their own by not renewing a previously-instated tax break. Despite all the potentially positive provisions of the bill, this is the one you and I noticed.
For a household earning $40,000 per year, 2% is $800 per year or roughly $67 per month. For most of us that’s a big chunk to disappear. But for many of you reading this, you’ve walked into the office to be told the company has to choose between a 10% pay cut on everybody or a layoff. Thankful to have a job, you go home and try to explain to your family that you can’t afford to do as much because you won’t bring in enough money. So back to my original question – how do you deal with a pay cut? Here are five tips to make sure you make the most of your income and weather a cut in pay:
- LIVE ON A BUDGET. I will go to my grave trying to convince people this is the absolute best way to maximize every penny that comes into your household. If you’re not doing a budget, start it NOW. Need help? Sign up for Stacy’s daily emails and get my free e-booklet, “It’s Not About Money” to help you get started.
- Set priorities. If the math of your budget doesn’t work, something has to change. The formula of INCOME – SAVINGS – EXPENSES = 0 is pretty much set in stone. If the math doesn’t work, define what is important in your life and change based on those priorities. If that means cutting off the cable or eating at home on weekends instead of a nice restaurant, so be it. It is your money and your budget – set priorities and use your money to fund what is important to you.
- Review every bill. Do you know how many times during a counseling session I’ll ask someone why they’re paying a fee on some random bill and they can’t tell me? If you don’t know why you’re paying something, figure it out! If you don’t have to pay it – don’t!
- Consider alternative income sources. Whether it is a yard sale, eBay, Etsy or some other source altogether, there are plenty of ways to generate some extra income. If you are struggling to make ends meet, don’t assume the only thing you can do is cut expenses.
- Make yourself more valuable. In the workplace, you receive a paycheck based on what the employer believes you’re worth to the company. Prove you’re worth more! While this isn’t a short-term strategy, you should always be working to meet and exceed expectations. Whether through a promotion or a frank discussion with your boss, if you believe you are worth more money, prove it. I’ve encouraged many folks who are doing much more than their job description to have a discussion with their boss a pay raise. If done the right way, this is a positive experience for everyone involved. Be careful not to make yourself look like a greedy little punk, which can make the whole thing backfire.
Need more help? Consider buying my book, “From Debtor to Better.” In it, I discuss in depth ways to cut expenses, maximize income, pay off debt and free yourself from the burdens of being “…slave to the lender” (Proverbs 22:7).
What are you doing to handle your cut in pay?
|
About Barry
Hi, I'm Stacy! Welcome to Stacy Makes Cents! I'm a naturally-minded, frugal living mama, who likes to blog about living debt free in everyday life. Delicious (and healthy) recipes, money tips, and frugal living posts abound here! Enjoy your stay. Romans 13:8 
Last year, our health care premiums went up $6,000/year or 500/month- thanks to Obamacare. We got worse coverage moving from a great PPO to an HRA plan. On top of that, our prescriptions costs skyrocketed. I have to take thyroid medicine every month, in 2011 it cost me $7 in 2012 it cost me $38. This year we are dealing with the SS issue and more increases in health care costs- to the tune of 4,800/year or 400/month. So in two years we have lost 1/4 of our income. Things like my annual physical may be covered but my trip to the endocrinologist is barely covered. What use to be a $25 co-pay now costs $300+, I can’t afford to go every 3-4 months so now I only go twice a year. He is very understanding and has said that he is facing the same issue with patients that have much more serious concerns like type 1 diabetes and such. However regular care = less likely to need more expensive care in the future.
I have a family member who had a brain tumor and cannot afford the health care costs. I don’t see how the affordable health care act is making health care affordable. I think we should rename it the UNAFFORDABLE health care act.
We haven’t had cable for years and became a one car/public transit family 4 years ago. The only thing we could cut was phone service. We now have an Ooma which saves on the monthly cost.
I hear this story all too often. Be encouraged – you’re not alone and you sound like you’re already on your way to making it work.
These are great, but before the pay cut happens, ideally, you are socking away some money every month for retirement (or your kids’ schooling or whatever). If you are doing that, you can offset some of the paycut by simply reducing your socking away portions. So instead of saving $200, save only $175 per month (for example). This won’t completely undo the $67 pay cut (as an example) but it will reduce the sting. And if (when?) things turn around, instead of spending your new raise on fancy blue jeans and a big cable package, put most of it back into your savings allotment. This is not a perfect solution by any means, because it assumes a certain level of financial comfort to begin with, but if you can save even just a few dollars each week (or better yet, pay yourself first!) you will have a better cushion when life gets bumpy.
If push comes to shove, this is one way to make it work. Unplugging your savings can hurt you in the long run, but you have to survive the short run to make it there!
Two years ago I dealt with a 100% paycut! I was unjustly fired; after 8 mos of filings, hiring an atty, appeals, etc to get my unemployment, it was denied once and for all. All I had was final paycheck and vacation was paid out. Luckily it lasted about 4-5 mos.
For me, financial changes were already in effect before losing job. I changed my coffee habits (“Hi, I’m [name], I’m a Starbucks addict.”) By time I lost my job I was already making coffee at work or taking to work (from home). That in itself was a huge difference! I’d already cut back on eating out/bringing in.
Ever since I’ve changed cell service providers (my already reasonable monthly payment DECREASES every 6 mos when make timely payments, will eventually bottom out at $35/m).
My internet provider (need to do job search/appls) is far better and far more reasonable than that with which I started; cost cut by just over 50%.
I know where the least expensive gasoline can be found.
For groceries, buy store brand in large size/bulk for better buys.. use coupons when available.
Never was a shopaholic or clothes horse, but when I do make purchase I go to thrift stores.
Maintain a monthly budget on a spreadsheet too.
Also found an alternative income source.. isn’t steady, but it helps.
In the end it’s all about lifestyle CHANGES, changing HABITS. Make the changes now, while still employed and hopefully before a pay cut or job loss.
It’s made quite a difference for me. Money saved has enabled me to make meaningful/cause-related trips to Mexico border towns, travel to see family for (almost) FREE, etc.
Great advice! Thanks for sharing how you overcame the challenge life threw at you.
I think people should contact professional tax planners for these situations, or go to the IRS website and try to interpret the tax laws that are ever-changing. I was shocked to read so many people did NOT know about these increases in SS alone. It was a big fight in our government last year (anybody else remember this?) and I thought we all knew they were set to expire as they were temporary to begin with. I don’t know yet what has happened thus far in our tax laws (not for lack of trying, the IRS doesn’t even have a Publication 17 out for the 2012 tax year) but as of last year the child tax credit was/is set to expire in 2013 along with many others. This changes so much in my personal tax planning and I think we as Americans need to be aware of the tax changes that are going to happen or might happen, so we can be reasonable and plan for them. It is very important for us to evaluate our W-4 every year. This is very easy to do, but often over-looked. Please do your best to protect yourselves, as stated above our government does not know how to handle money. I could go on and write a book on this but I don’t want to take over Stacy’s blog
Please, Please ( seriously I am begging) find out about your tax laws and save yourselves and your families. It will get worse before it gets better.
You’re absolutely right that our society is very uninformed when it comes to taxes and tax law. I would be 85% or more of that is not laziness or ignorance, but the complex nature of the whole system that lends to difficult interpretation. It is HARD to decipher a lot of what the IRS puts out there, and I even wonder if that’s on purpose. HA!
I do think it is on purpose. We have tax laws put into place (great), then we have bi-laws of those tax laws(What the heck?) and then provisions and extensions of bi-laws(I am lost now) and when it is all said and done, our heads are spinning so fast we don’t know know East from West. I don’t think our elected officials know either, lol.
HA now I am stuttering in my dialog.
My husband was diagnosed with brain cancer in July. After surgery and 6 weeks of daily radiation, he’s going through chemo 5 days a month. Thank God for health insurance. As a military retiree, he has coverage for life; I can’t imagine what it must be like for people who don’t have it!
But… at some point he won’t be well enough to work, and we’ll still need to pay for our son’s orthodontics, put two kids through college, keep the lights on, etc.
So, in addition to our habit of putting money from each paycheck into savings BEFORE we ever see it, I’m also learning to ‘sweep’ our checking account every payday. That is, since our budget’s tightly controlled, if there’s any money left in our checking account before his paycheck is deposited, I ‘sweep’ that into a long-term savings account and still know that, because of our budget, we’ll still meet that pay period’s financial obligations.
Katie B. of HousewifeHowTos.com recently posted…How To Tuesday's Link Party Is Back!
I’m sure your family has gone through a terrible experience BUT I’m so glad to read a very positive and awesome way you’re making it work. You’ve done a great thing to address moving any leftover funds to prepare for whatever tomorrow brings. Thanks for sharing this great tip. Prayers for your family.
talking about a pay cut well try living on S.S.with Med care garbing they share there nothing left I can make more working in 1 day but Doc says NO way you work so S.S. suck on living I pinch penny so much they seek this is a pay cut for me
Our health insurance premiums tripled last year. It was SO HARD. We’re still recovering, our family simply couldn’t afford it, and because of pre-existing conditions we couldn’t be without it. The Lord provided though.
He always does – ever faithful.