Recently, a friend of mine took a GIGANTIC pay cut, which in many ways rocked his world. He’s a very accomplished business person who decided to shift career gears in a major way. This shift is a calculated risk that allows him to satisfy some non-monetary goals and potentially improve his financial situation over the long-term. But as it stands now, he needs to deal with the impact of a much lower income. He was forced to make lots of cuts. This got me thinking. Could calculating the 25% of your expenses that you’d cut be a good exercise for everyone to try? I believe it is. So I put this question to you. What cuts would you make if you were forced to reduce your spending, semi-permanently, by about 25%?
People take pay cuts for lots of reasons. My favorite reason for people taking a pay cut is when they measure their success and satisfaction on a non-monetary scale. This always seems like a great plan, but the harsh realities of your financial past and current financial obligations can make this challenging. Even if you change jobs for the best reason in the world, if your pay is cut by 25%, then your life is going to have to change drastically. I’ve seen this sort of pay cut happen to several people. Very few of them gracefully pulled it off. I believe this is because we find in comfort in spending money on things we’ve always spent money on. There’s something comforting about your expenses. That’s so weird, but it’s so true. You can’t afford to take a 25% pay cut, if you don’t change your habits.
So here’s what we’re going to do together. We’re going to hypothetically cut our incomes by 25%. So if you typically bring home $2,500/month, you now have $1,875/month to work with. If you happen to bring home $6,000/month, then you now have $4,500/month to live on. Have you panicked yet? Some of you have, and some of your haven’t. But both groups need to humor me and keep reading.
Take a look at Pete the Planner’s Idea Budget, below. Let’s use this as a basis to discuss how you could go about reducing each and every spending category.
Housing– There are three ways you can spend less on housing: move, refinance, or get a roommate. Other than that, your rent or mortgage payment isn’t that flexible.
Transportation- There are several ways in which you can save money on transportation. You could drive less. You could trade your car for one that gets better gas mileage or has a lower monthly payment. You could also switch your auto insurance to a different carrier, thus potentially saving money. Get aggressive in this category.
Groceries and dining- Yep, this is the big one. If you had to cut 25% of your income, you gotta start here. You can dine-out less. You can eat less-expensive food. And you can certainly cutout expensive habits like coffee, booze, and anything else fun.
Saving- If you happen to be saving 10% (or more) of your income prior to this 25% pay cut, then you probably will need to eliminate some of your future savings, temporarily. Is this terrible advice, technically speaking? Of course it is. But it’s real.
Utilities- There’s more opportunity to change here than you might think. You can adjust spending on your mobile bill, your satellite or cable bill, and your home internet charges. You can cancel your home phone service, if you haven’t already. And of course you could use less energy in cooling or heating your home.
Charity- Assuming you are currently putting 5% of your current income to charity, you can easily reduce this. That being said, anyone that has this sort of charitable spirit will most likely replace their monetary giving with volunteerism or other forms of non-monetary giving.
Clothing- You better hope that jacket comes back in style. Clothes are some of the first items on the chopping block, if your pay is also on the chopping block. Don’t forget that dry cleaning is part of this category too.
Entertainment- It doesn’t always cost money to be entertained. You better get very familiar with this phrase, especially if you take a 25% pay cut. Entertainment is probably gone.
Medical- This category was always meant to cover after-tax medical expenses such as co-pays and prescriptions. Short of improving your health via a proper diet and maintaining a high level of fitness, a pay cut won’t really touch this expense category.
Holiday and Gifts- As weird as this is, I find people struggle in this area due to embarrassment and guilt. Should people feel embarrassed or guilty if they reduce their gift budget? Absolutely not, but they so often do.
Misc- There is a ton of opportunity here. If you had to cut 25% of your expenses, then it may behoove you to cut things like having your home professionally cleaned. Lawn and landscaping maintenance probably need to go too.
Expenses not listed- You didn’t see debt repayment on the budget, did you? Nor childcare, right? Yeah, I know. They are never included on the ideal budget. But that doesn’t mean you can ignore them. You have to make room for debt repayment and childcare expenses by reducing spending in the other budget categories. I know this to be true because I had to personally reduce our spending and saving to make room for childcare expenses. The harsh reality of taking a 25% pay cut is that your debt repayment will most likely suffer greatly. My friend that inspired this post is dealing with this exact problem. He was on a nice path to repay his consumer debt, but that all changed when he took a huge pay cut.
How’d you do? This exercise is one of the hardest things I’ve asked you to do. Hopefully you take the time to take the challenge. I’ve found that forcing yourself to hypothetically cut 25% of your income is a really good exercise because it informs you of possible indulgent spending. I’m really hoping you take a look at some of these expenditures, and decide to whack them now. Whack them so you can pay down some more debt. Whack them to increase the percent you save. Whack them, because you should.
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.