Coping with Shrinking Paychecks

A new year is typically a refreshing time when people try out new resolutions, attempt to be more disciplined with respect to health and financial issues, and typically encounter the paychecks that have historically incorporated raises, cost of living adjustments, and promotions.  Sadly for many, most managers had implemented a hiring or salary freeze last year, reduced bonuses, and, as in the case of social security, failed to have a cost of living adjustment for the first time since payments began to be indexed to inflation.  To add further to the gloomy paycheck news, many people (like me) have encountered smaller take home pay as the state of California has revised its withholding more than they did this time 12 months ago.  Although the total dollar amount is not huge ($54 per month) it is annoying to see paychecks shrink.  I’m sure many other people are coping with other causes of shrinking paychecks including higher taxes, increases in insurance premiums, and unplanned furloughs.  With this in mind, here are some potential suggestions to limit the damage of a smaller paycheck:

–Rework your budget and spending priorities – when many people encounter a shrinking paycheck, they leave their main expenditures untouched, such as housing, groceries, and car expenses; and immediately cut back on saving and investment, since that was seen as extra.  Unfortunately, this makes them even more vulnerable to future income shocks or periods of unemployment. And if there’s one lesson overall in this recession it is that labor and employment are at risk. It’s best to try reworking the entire monthly budget and keeping the saving area protected if possible.  In particular, if your emergency fund is smaller than it should be, beefing this up is a good idea.

–Try to maintain savings and investment ratios– If you are unable to keep saving at the same level as before due to a reduction in pay, try to keep the saving percentage the same. For employee sponsored retirement schemes, withholdings are typically done on a percentage already.  Having amounts automatically withheld from your paycheck will help to make things easy to implement.

–Look for more ‘latte’ savings — obviously if your paycheck has shrunk and you want to keep savings levels flat, finding ways to reduce expenditures makes a lot of sense.  There’s a plethora of great ideas on how to save money out there, so I won’t repeat much of that, but I would encourage people to look at finding a recurring monthly bill to reduce, as that matches the income reduction pattern.  For example, last year, I combined our 2 separate cell phone plans into one family plan (and reduced the minutes since we were under-utilizing them) for a saving per month of about $60.

–Look for alternative income opportunities – there are many ways that $54 per month can be earned in additional income rather than expense reduction.  Many people may find it more empowering to keep their spending levels untouched and develop freelancing opportunities. The added benefit is that once these income channels are developed, they can be cultivated to augment paychecks on a regular basis.

I’m interested in hearing if others have experienced the shrinking paycheck phenomena and suggestions for coping.

shared at this week’s Carnival of Personal Finance