It’s one thing to optimise your spending at your leisure when times are good, but what happens when it all suddenly goes wrong? Could you deal with having to drastically slash your expenses in an emergency?
My father is a practical man, and most of his working life has been spent a manufacturing industry. He worked his way through different companies to a management position, and received a good wage for his work. He was good at his job, and at the job of those he managed; his saying was that he wouldn’t expect anyone to do something he couldn’t do himself.
Unfortunately, his industry is in something of a decline, and a few years back he found out just before Christmas that the company had gone into administration and everyone was to be made redundant.
Now, my father has almost gotten used to this by now. He has had the misfortune to go through about a half-dozen redundancies in his career but has never lost a day of work from it, always finding a new job before the old one ends.
Unfortunately his previous redundancy had caused him to have to go from working a few miles from home to working over sixty miles away, as his industry slowly contracts and companies fold. There were few opportunities left in his field, so rather than complaining about how unfair it all was, he instead took a job back on the factory floor at a nearby company after over a decade as a manager. The pay? Less than half his previous gross salary.
I remember this as a very tough time for my parents. My mother also works, but for the first time in thirty years together she became the main earner in the family. But they managed, and despite the reduction in income my father actually relished the new job (less responsibility, shorter shifts, and a five rather than sixty mile commute). Reflecting back on this time, I started to think about how I would manage a 50% pay cut.
What if my pay was cut by 50%
I ran the numbers to see what a 50% cut to my gross pay would look like. Due to the personal tax allowance, luckily this wouldn’t quite halve my take home pay, but would slash it by about 40%. As I’m relatively frugal, the amount it would leave me with is actually about what I spend each month on average, which already puts me in a better starting position than many others if this were to happen to them. But that wouldn’t leave any money for savings or investments, which would be a major concern. So here’s how I would go about tackling this.
- Cancel subscriptions – £25 for gym and Netflix, happily slashed if the going got tough
- Cycle to work – £55 between fuel and parking permit. I did start cycling earlier in the year, but the cold and dark mornings have pushed me back into my car for now. But could do it if necessary, and would make up for no gym membership
- Cut back on groceries – £50. I don’t spend much on groceries, but I know from my student days I can eat well for less than half what I currently spend.
- Embargo on drinks/eating out – £60. This isn’t something I’d miss terribly, and would be happy to have a soda and lime while out with friends for a tenth of the price of a beer.
- Lodger – £300. I currently let out one of my bedrooms for tax-free income thanks to the Rent a Room scheme.
- Second Lodger – £300. I would consider moving into my smaller third bedroom and letting out my room for more tax-free income.
- Do everything possible to get another job around my old salary – Duh
- Temp work – Luckily my job has a big market for temp work filling rota gaps, often paying significantly more than my current hourly rate. Downside is there’s no career progression from doing that work full-time, which is why I wouldn’t do it full-time.
I found working through this scenario immensely useful. While I’m not expecting to face a 50% pay cut any time soon, I’m confident that I could manage to firstly keep afloat, but also continue to save and invest while I tried to restore my primary income source.
Which leads me to an interesting question. Now this process has identified where I could slash my expenses and boost my income, which of these things am I prepared to do right now while times are good? Instead of doing these things out of necessity when hard times hit, doing them “because you can” means you could speed up your savings and have a healthy emergency fund so you’re prepared for the tough times.
It also highlights the importance of living below your means and having multiple income streams. The lower my spending level, the less of a struggle it would be if my income were to drop. Similarly, my rental income is unaffected by any employment issues on my part, and provides a healthy boost to my savings.
Now it’s your turn!
How would you approach a pay cut like this? Have you ever actually been in this situation?