Could you survive a major pay cut?
That’s a question none of us ever wants to answer. Unfortunately, it’s a harsh reality many Americans face these days. If you’re looking at a financial crunch, here’s a 5-step strategy designed to help you weather the storm.
- Develop a budget. If your income suffered a pay cut (or soon could be), get uber-focused on developing a budget. This number-crunching reality check will show you where your money goes and where to cut back.
- Reduce expenses. If your income drops, your expenses should too. To free up cash, study your current cash outflows and find places to cut back on nonessentials now. Expenses like premium cable channels and frequent dining out are “wants,” not “needs,” and are a great place to start.
- Build up your savings. If there is ever a chance your paycheck could get disrupted, your first line of defense is to have cash in the bank. So take the money you’ve freed-up by cutting expenses and build up an emergency fund.
- Hold off on large purchases. Occasionally, families buy big-ticket items such as household appliances or cars. But if your finances are on shaky ground, put those purchases on hold.
- Ensure access to available credit. No, you don’t want your current circumstances to bury you in debt, but make sure you have credit available just in case you run out of cash and don’t have any other options. As an additional layer of financial security, establish overdraft protection on your checking account if you don’t already have it and research any related fees associated with any borrowing you have to do. Again, you should avoid taking on extra debt if possible, but use it as your safety net if you have to.
If you’re fortunate enough to be unaffected by Washington’s woes, your belt-tightening efforts will still leave your finances in better shape.