Facing a Pay Cut or Reduced Income? Here’s What to Do Right Now
Facing a pay cut is scary, but when you know it’s going to happen, how you get ready for it is key. Instead of waiting until your pay cheque gets smaller, take steps right now to bring your spending in line with what your reduced income will be. This can mean the difference between surviving the tough times or dealing with a financial disaster later on. Here’s what to focus on:
Be Realistic About Your Essential Expenses – Even With a Pay Cut
Before worrying about anything else, make sure your essential living costs are taken care of. Whether you’ve taken a pay cut, been laid off, are on strike, or are locked out, these are the expenses that you need to survive. First pay your mortgage or rent, and then make sure your food and medical needs are met. If you’ve topped up your mortgage payments to pay your house off faster, this is a good time to contact your lender and go back to making the base payment. Next, pay your utilities and other necessary costs, but draw the line at purchases or services you don’t need right now (especially package deals and contracts that renew automatically). And be honest with yourself as you look at your expenses. This is the time to focus on what you need, not what you want. A good way to do that is to avoid credit cards and pay only with cash, a debit card, or an app linked to a bank account.
If your reduced income and savings is not enough to afford your essential living expenses, your next step is to find ways to boost your cash on hand. In the short-term, this might mean taking a look around your house to see if there’s anything you could sell, whether that’s a car, electronics, jewelry, antiques, or other assets.
In the medium-term, think about increasing your income by taking in a boarder, renting extra space in your home, or doing part-time work. Of course, keep in mind that these come with their own costs and considerations. For example, you only want to take on an extra job after calculating if it will actually earn you money without risking your main job.
Banking, Credit, and Debt on a Pay Cut
When facing a pay cut, most people don’t want to change how they’re living and will make up the difference by using credit. However, doing this can make it hard to get back on track with your finances in the future, even if your income does goes up again. So long as your essential living costs are met, avoid taking on debt when you don’t know when you can pay it off.
If you already owe your bank or credit union money through loans or credit cards with them specifically and fall behind on the payments, you’ll need to take extra steps to keep the money you do have safe. Your financial institution can use funds in your accounts to pay down debts you have with them without your permission. To protect the money you need to survive, open a new account at a financial institution where you don’t owe anything. You’ll be able to do that even if you’re in debt or can’t make a deposit right away. Learn more about your banking rights and responsibilities and deposit all future income into this new bank account.
If you can’t pay your debts, your credit rating will be affected. It will recover when you’re able to make payments again. Your focus needs to be on taking care of yourself and your family, not your credit rating. However, you should explain your current situation to your creditors. They are better able to assist you before you fall behind on your payments.
Get Help to Manage the Challenges of Reduced Income
Community assistance is available to those who need it. If you’re struggling to make ends meet, don’t be afraid to ask for help at the food bank, your place or worship, or any groups you belong to; you can always repay the favour when you’re back on your feet. Also apply to any services you may qualify for, such as COVID-19 relief, EI, and other employment-related insurance. With insurance like EI, you’ve already paid for their use ahead of time with your premiums, so this is the moment to make them work for you.
A family plan might be needed to get everyone’s cooperation and participation. Help younger kids understand that their needs will still be met but that some of the extras won’t be possible right now. Teenagers and young adults can do their fair share to either help around the house or contribute towards their expenses. When the going gets tough, focus on solutions, not blame.
What to Do When Your Pay Cut Feels Overwhelming
Dealing with a pay cut and reduced income can feel overwhelming, especially when you and your family are depending on that money to survive. If you have questions about your finances, need help making a solid budget that brings your spending in line with a lower level of income, or want guidance on dealing with your debts, the Credit Counselling Society is here for you. Reach out to us toll-free at 1-888-527-8999, send us an email, or start an anonymous online chat. One of our credit counsellors would be happy to help you in a free and confidential appointment.