How to Cut Your Lifestyle When You Take a Pay Cut

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Updated September 26, 2020

There may be times when you have to adjust to a cut in pay. You may decide to switch companies or careers and take a lower salary because the opportunity for growth is great. You may be forced to take a pay cut due to layoffs or because your company restricted their bonus plan. Yet, another option is that you may want to a job with less stress, and are willing to take the pay cut to remove that stress.

Often people—especially in commission sales—will start a job expecting to make more than they actually bring home. When you know your paycheck is decreasing, you need to take immediate steps so that you can continue to manage your money effectively. With any pay cut, it is important to carefully consider when and how you are going to cut back on your lifestyle.

Create a New Budget

Young couple with receipts and calculator creating a budget — Richard Elliott / Getty Images

Your first step is to create a new budget based on your new paycheck. If your new job is in a new location, your cost of living may adjust up or down and should be considered when you accept your new offer. A salary can cover more if you are not living in an area with a high cost of living.

When you build your new budget, make sure that you are listing the necessities and luxuries in separate columns. It will make it easier to find the areas that you can cut back on more easily. If you are in a new area, or unsure if your income will cover your expenses, you may need to switch a bare-bones budget at first. You will need to make sure you can make it with your current salary.

When you face the situation of making less money, it will affect other areas of your life. Also, if your job offers bonuses, you should not include them in your budget.

Cut Back on Your Discretionary Spending

Woman paying with credit card — Peter Dazeley / Getty Images

Often the easiest way to make budget cuts is to stop or limit your discretionary spending.

You can do an easy across the board cut on all these categories. Try cutting your clothing, entertainment, and food categories by 10% across the board. These types of cuts may make it easy to find the money that you need without drastically cutting back in any area. However, they may not be enough, and you will need to pick and choose the types of cuts that you make.

One thing that may help you categorize where you can cut back is to determine the hourly cost of the items you buy. This tip may help you prioritize where you make your cuts easiest.

You may want to try alternatives to some of your traditional spending habits to cut your expenses. It helps to have a set budget number that you are working toward. Perhaps you have an income shortfall of $2000 per month. Knowing this number will give you a solid amount that you need to trim from your budget, and can make it easier to prioritize your expenses.

Also, it is vital that you stop any bad financial habits because you no longer have money to waste on them. A frugal challenge may help you find extra ways to save and get control of your spending.

Look for Ways to Save on Your Necessities

Bank Vault — Peter Dazeley / Getty Images

You can also work on cutting your monthly bills. When your lease is up, look for a cheaper place to live, or you may need to consider selling your home and downsizing if your income decrease was big enough.

Another option is to scale back on your other monthly plans, meaning cable, Internet, and cell phone. Although the savings may not be huge by paring back on each plan, the combination may be enough to help you save money. Cut out all the bills that you do not need. Often monthly bills like the charge for Netflix or Hulu are shuffled into the necessities category since they come out monthly, but they should not be.

Look into finding more affordable car insurance and health insurance. You may also consider changing where you shop for groceries to cut back on your food bill. If you usually shop at a more expensive store in the area, and you may be surprised at how much you can save simply by switching stores.

These steps may mean that you do not need to cut your discretionary spending as much. Also, you may be able to use or find other ideas with these fifteen ways to save money.

Don't Short Change Retirement or Savings

Saving by Putting Coins Into Jars — Theerapan Bhumirat / EyeEm / Getty Images

When you are making cuts, it can be tempting to cut your savings or retirement contributions to make ends meet. However, this decision will hurt you in the long run. You still want to contribute 15% of your income into your retirement accounts. Of course, since your income is lower now, the dollar amount of your 15% contribution will automatically be less than it was before.

You should keep the same savings goals. If you were contributing more than 15%, you may want to only decrease the dollar amount to meet that percentage level. If you can avoid cutting savings altogether, it would be best. It should be a last resort instead of the first thing you cut.

Take a look at your goals and find a way to continue to save money. If you make it automatic and have it transfer when you are paid, it will be easier to keep saving. If you have a smaller paycheck, it is even more important to have savings to rely on when you are dealing with an emergency.

Think About Your Long-Term Goals

Senior couple looking at photo album — MoMo Productions / Getty Images

If this is a planned pay cut, be sure that you can still meet your other financial goals. This can include things like homeownership, retirement, college savings, or vacation planning. If you know this is temporary, for example staying home until your children are in school, make plans on how you will improve your income when it is time to reenter the workforce. You may need to keep up with certifications or other training so that you can easily find a job.

Consider switching careers completely if you are not happy and look into opportunities to further your qualifications and increase your salary. Be sure that you are not running up debt during this time because it can continue to hold you back once you begin working again. It takes discipline to handle a pay cut because you are used to certain lifestyle expectations and it can be even harder when you have children in the home.