- Emily Barber
- Wednesday, March 09, 2022
Our financial situations will change many times throughout our lives. You might get your first job with a steady salary or receive a significant raise. Sometimes you might end up taking a pay cut with a new job, which isn’t ideal but can be worth it for other advantages. When your income changes substantially, it’s time to revisit the way you manage your money.
I want to acknowledge that a lot of budgeting advice, including the upcoming tips, assumes you make enough money, by which I mean at least a living wage. In Richland County, the living wage for an adult living alone is $14.96/hour before taxes, assuming they work 40 hours/week. South Carolina abides by the federal minimum wage, which is less than half of the living wage. Many financial advice articles I’ve seen aimed at minimum and low wage workers include suggestions such as starting a side hustle or seeking a better paying job. To me, this pattern indicates that we know some jobs simply don’t pay enough for workers to save or invest. Money troubles often carry unnecessary shame or embarrassment. But if your workplace compensates you below the living wage, you might have to “live beyond your means” just to... well, live.
When you’re getting more money
Get a feel for your take-home pay
When managing a change in pay, you might need a few paychecks to figure out exactly how much you’ll be seeing in the bank. This is especially true if your pay varies at all. Even if you just got a big salary increase, resist the urge to bump your overall spending right away. Keep your spending habits the same for three months at your new pay. Once you’ve got a handle on how much you’ll be taking home each month, it’s time to decide when you need or want to put some additional money.
Calculate your essential costs
It’s a classic for a reason: Figure out how much of your income will have to go towards certain costs. The basic essential costs are housing (rent or mortgage), utilities, transportation, insurance, healthcare, and food. Many of these can vary each month (power bill and groceries) or hit you in chunks (annual car taxes and check-ups). If the cost of something varies, budget for the higher amount so that you’ll have fewer surprises and some wiggle room during lower-cost periods. Include anything you know you want to set aside money for, such as subscriptions and charitable giving.
Build savings in a way that works for you
The key part of saving money is finding a strategy that works for your life. Suggestions for savings often fall in the range of 10-20 percent. Pick an amount that is noticeable, but doesn’t strain your essential costs. There will be times when you pick saving over something fun, but you don’t have to every time. It’s also okay to be honest with yourself about how much you can save and experiment to see what works. If you’re coming into a higher salary with little or no money stashed away, you’re far from alone; as of August 2020, roughly a third of Americans had less than $1,000 saved.
Plan around your negotiable spending patterns
By negotiable, I mean important purchases outside regular necessary costs. Things such as clothes, hobbies, gifts, or home upgrades are needed, but the amount you spend can vary tremendously. It can be helpful to budget and set money aside even when you aren’t saving for a particular purchase. You can save specifically for expensive events, such as the start of the school year, so you end up pinching fewer pennies at the time.
When you’re getting less money
Switching to a lower salary is difficult because you have inherently less flexibility. Less income might necessitate big lifestyle changes. In this blog, I’m offering advice for those moving to a lower but still livable salary. The following tips aren’t intended for those who have lost their job or, as mentioned above, are moving to compensation below a living wage.
Build savings early and dust off the budgeting skills
Sometimes people take pay cuts in order to change careers or get other work-life balance benefits. When you can see a lower income on the horizon, that’s the time to start saving more aggressively and figuring out a new budget. Saving might become more difficult, especially when you’re adjusting to a lower salary, so an extra cushion is helpful during the transition.
Prioritize your unnecessary spending
With less money, something will have to go. One of the first steps to reduce your spending can be to cancel all – and I mean ALL – subscriptions to see which ones you actually miss. You can also add other spending to this experiment. Most of us have some extraneous purchases floating around, and eliminating them for a set time can help you get clarity on which ones you definitely want.
Review your recent large costs
Take a look at your spending over the last year and take note of any unusually large purchases. This could be anything from an appliance replacement to travel for a friend’s wedding. If something similar is likely to come up again, factor them into your budget. Higher pay makes unexpected expenditures doable, but more planning is needed when you’re taking a pay cut.
Talk money with your loved ones
I believe talking about finances with people outside your household should be a more common practice overall. Especially if you are going to have to change your socializing habits, share your changes with friends and family who might be affected. Talking about your budgetary limits is better than being evasive or simply saying no to an invitation that you would normally accept. Be honest and find more affordable ways to spend time with your loved ones.
Many thanks to Tara E. of Sandhills for the first-hand advice on transitioning to a lower salary!