Surviving a Large Pay Cut

14.8%! OMG, 14.8%.  The headline unemployment report released on Friday indicated that nearly 15% of Americans are unemployed, discouraged from looking for work, or substantially underemployed.  As someone who used to analyze economic data and write (dry and often boring) analysis based on them, I usually view these releases with a sort of casual indifference.  But the 14.8% caught my eye, as it certainly indicates a large percentage of people facing a substantial cash crunch and many more fearing layoffs or pay decreases.

When I wrote a post entitled When Frugal Means Forever, I wanted to share my experiences in dealing with a planned career move that resulted in a substantial (80%) pay cut.  In my case, I had months to think about and plan for the career switch.  Given the current economic situation, unfortunately I think that the similar circumstances will be imposed unwillingly on a number of people.  Better planning can certainly help out, but frankly I am disappointed at much of the advice that I see from professional financial advisors.  As this recession looks deeper and more persistent than past views, general advice to stay home more or postpone vacations, seems a misfit for the current situation.  I think that the best advice should better match the situation.  Here’s my take:

–First of all, Get Real. By this I mean, that the actions should match the situation.  Are you facing a large paycut? Then, large budget moves need to be contemplated.  Do you fear being laid off? If so, you need to anticipate the search for a new job will take longer than previous episodes.

–Create an emergency budget from the bottom up — many people start from the top down, as in I spend $xx on groceries, and I should look to trim this by 10%.  This usually results in only small incremental savings.  See the point above, get real.  Start with a blank sheet of paper and build a budget based on what is really needed.

–Focus on cash flow — look to conserve the outflow of cash as much as possible, and also look for ways to improve incoming cash flow streams.  In particular, focus on outflows that are recurring, such as monthly charges, subscription fees (housing, car payments, cable, gym membership, phone bills, etc…)

–Contemplate big lifestyle changes — including starting your own business, freelancing, and moving to a cheaper locale.  I saw several friends accumulate substantial credit card debt during the dotcom meltdown because they only started thinking about these big changes months after their employer went under.

–Inform others of your situation–especially family and friends.  In addition to building a support network, which is extremely important, someone within your circle may have suggestions and contacts that are highly valuable.

posted at this week’s Festival of Frugality