What to do when you’ve had a pay cut
Don’t panic — we’re all in this pandemic together, you just need to plan
Coping with a pay cut is as much about managing your emotions as it is about managing your money. You have to get over the anger, hopelessness or denial and get planning. Here’s what you need to do.
1. Rework your budget.
A budget is a plan for your money, and if you don’t have one, you have no control over your finances. If you’ve never budgeted, now is the time to start. Your budget doesn’t have to be complicated. In fact, the simpler the better.
Begin by listing all your expenses, starting with your fixed expenses, such as your home loan or rent; rates; car repayments; life and other short-term insurance premiums; school fees; and all debit orders for expenses such as a cellphone contracts and any credit agreements, including credit cards.
Now list all variable expenses, such as food, electricity and transport costs.
A budget balances what you spend against what you earn. If you’re spending more than you earn, you’re living on credit, which is a road to financial ruin. You have to cut your expenses so that you’re living within your means.
John Manyike, head of financial education at Old Mutual, says times such as these call for boldness. “You may need to downgrade your car or your house or move your kids from private to public schools,” he says.
Be discipled when discriminating between needs and wants, says Dhashni Naidoo, manager of consumer education at FNB. “Needs are for survival and the rest are wants. Reduce your spend on non-essential items such as cellphone costs.”
With most of us still under the lockdown, we aren’t spending on eating out, travelling to and from work, or ferrying children to and from school and extramural activities. For many people, cutting these expenses has led to a substantial saving.
The same applies to any other regular expenses that may have fallen away, such as a gym membership that has been frozen. Tally up all you’re saving, no matter how small the saving may be, because this can soften the blow of loss of income.
Many people who have taken a pay cut have cut back on their school fees accordingly. So, if you’ve taken a 30% pay cut, consider paying 30% less on your school fees for now.
2. Take a payment holiday.
If your pay cut is temporary and any of your creditors are offering you a payment holiday, consider taking it. A payment holiday is typically an extension of the term of your credit agreement by three months. It can have the effect of freezing your account for a period, giving you a break from paying for three months, providing you with some relief.
Naidoo says that when exercising this option, make sure you understand exactly what the long-term cost implications are.
Payment holidays are typically only offered to customers who are up to date on their payments, but some banks are offering them to those who were no more than two months in arrears before February.
If you weren’t too far in arrears, make a proposal to your bank, showing that you’re living frugally and are serious about paying as much as you can as soon as you can. If you show goodwill to your creditors, they are more likely to extend goodwill to you.
3. Negotiate with your creditors and insurers.
Never just stop making payments. A credit agreement is a contract and failing to pay has consequences from an impaired credit report to judgment being taken against you. A life policy is a contract, too.
Both Naidoo and Manyike say that rather than cancelling insurance policies, review your cover and reduce it where possible, so that your premiums are reduced.
“You still need life cover for the benefit of your dependents. Your risks are still there. So speak to your financial adviser to find out if your policy comes with premium waivers or if there are features that you can do without,” Manyike advises.
4. Negotiate with your family.
Getting the buy-in of your family is crucial when you, as the breadwinner or a contributing member of the family, suffer a pay cut. It is most likely that everyone will have to make sacrifices so the new household budget works.
Speaking candidly to the family about money is necessary so that everyone understands the impact of your pay cut, and so that everyone’s expectations are managed. This is especially important if you’re helping support members of your extended family.
“Remember, you can’t give what you don’t have,” says Manyike.
5. Try not to lose perspective.
As hopeless as things may seem, don’t forget that this will pass. It’s perfectly normal to feel discouraged, but don’t allow yourself to “camp” there. You’re not alone.
For now, we all have to get used to living with uncertainty, which means living one day at a time. Try to be upbeat. It’s necessary for your mental health and that of your family.
“Our emotional well-being is being tested severely at this time,” says Manyike, adding that everyone needs support they can draw on, whether through spiritual beliefs or family.
Also, he says, don’t neglect your hobbies, especially if you could make money out of them.