Dealing with that pay cut5 min read . Updated: 14 Apr 2020, 04:24 PM IST
- After a pay cut, spend money only on core expenses for a while
- After meeting the basic expenses, if there is still some money left, only then think about investing.
As the country braces for lockdown 2.0, employees across most industries are staring at significant pay cuts. While it's a difficult situation to be in, the truth is the factors at play are completely out of our hands. But what's in our control is how we adjust to the new normal. Salary cuts definitely mean changes to the way we live and spend, but if we are smart we can tide over the situation with minimum pain.
“There’s no doubt these are tough times but you should also find solace in the fact that unlike millions of other people, you still have a job in such troubled times," said Dev Ashish, founder StableInvestor.com and Sebi-registered Investment Advisor. It’s important to not take the pay cut personally and accept what’s happened by changing your course of action. Here are some tips that could help one deal with the situation better.
Take stock of your expenses
One of the many things this lockdown may have taught you is the fact that basic living expenses aren’t very high. It’s the discretionary expenses such as eating out, travel and leisure, and other luxury goods that burn a hole in your pocket. “The lockdown has already cut down discretionary spends to bare minimum for everyone. It’s easy to identify what your core expenses are. Therefore, after the pay cut, spend money only on core expenses for a while," said Dev.
It is important to take stock of your expenses and cut down on the unimportant ones immediately. This should be your mantra even once the lockdown is lifted. “In a crisis situation like this, you will not have the time to ease into cutting your expenses. You’ll have get down to it like ripping off a band aid. If you’re spending way too much especially with your credit cards, now is the time to leave that card at home," said Shweta Jain, CEO, Investography, a financial planning firm. If you’re new into the workforce and spend a major chunk of your salary on rent and utilities, you’ll have to consider moving to a cheaper accommodation. Try and push all your big expenses until things settle down.
Reconsider your goals and investments
Were you planning to buy a car or renovate your house anytime soon? The pay cut may have disturbed some of your goals, especially the more immediate ones. As a result of the pay cut, you may be forced to reconsider some of your goals and evaluate if they are important right now or you can push them to a later date. “If you can delay your goals, do it to save up on some money. The more you save at this point, the more secure you’ll feel," said Jain.
After meeting the basic expenses, if there is still some money left, only then think about investing. “If you are unable to invest temporarily due to lack of surplus, it’s completely okay. You could pause your investments for a few months. Right now, liquidity is the king. Investments can be brought back on track once things normalize after a few months," said Dev. If you manage to have some investible surplus then figure out which of your goals are more critical and try to save for them first. Dev said long-term goals can be reactivated later because a few months of funding gap wouldn’t cause too much harm.
Keep away from loans
If the pay cut has caused a dent in your finances, you may be tempted to take on loans but Mint recommends keeping away from any form of additional liabilities in uncertain times like these. Taking on loans could pose a big financial threat if the situation deteriorates further. “Don’t opt for additional loans to fund your goals or discretionary spends because we are not certain about future. Keep your liabilities to a minimum," said Jain.
For your existing liabilities, if you’re feeling a pinch due to the pay cut, you could consider taking the 3-month moratorium offered by lenders. “If after accounting for basic expenses, you are still unable to service your EMIs, you can opt for the moratorium. But remember that this is not an EMI waiver. You will still have to service it after a few months (with additional accrued interest). However, it can be a temporary relief. If you don’t see yourself being able to repay the EMIs even after the moratorium, try to liquidate some of your investments but stay away from new loans," said Dev.
Consider alternate sources of income
If a pay cut has made it difficult for you to remain afloat, you may want to monetize on your skills and hobbies to generate some additional income. Giving online tuition, conducting hobby classes or teaching a foreign language are some examples. “During stressful times like these, taking up something that pays you as well as helps you keep positive is definitely a bonus," said Jain.
Since most companies are now working from home, you could use some time to upskill. There are many free courses online that can be of use. Upgrading yourself will help you get a better remuneration when the situation normalizes.
Be prepared for emergencies
It’s a pay cut now but if the economy continues to slow down, mass layoffs are inevitable. The current situation is a good reminder for why you must be ready to face any form of health emergencies that could arise. “Are you prepared financially if you were to fall ill? What if you lose your job? Do you have a personal health insurance cover or are you dependent on the cover provided by your employer? Review your insurance needs and buy an independent cover immediately," said Jain. If you’re the breadwinner in the family and haven’t bought a life insurance policy yet, now is the time to get a term plan with adequate sum assured.
If you haven’t already built an emergency corpus, the ongoing crisis should be a trigger for you to start building one right away. Financial planners say you should have at least 6 months’ worth of expenses in your emergency fund.
As is said, what doesn’t kill you makes you stronger. If you are able to cut down on your expenses and stick to basics, you would have sailed smoothly through a global crisis which is a victory in itself. Despite everything, if you are still able to put aside some surplus, it’s a big win.