COVID-19 is diminishing our health but also the wages of those lucky enough to be employed, including white-collar workers.
With more than 4 million U.S. workers having suffered pay cuts since February, what are we to do?
First, get the panic out of the way. We need to express our emotions and vent our frustrations before we can make solid financial decisions. If a salary decrease is on your horizon or if you think it may be, follow these steps:
1. Review debt details
Long-term debt:
Refinance a mortgage: Interest rates are low, and if you can reduce your rate by 50 basis points, you will save money on interest immediately and in the long run. Some banks are offering no closing costs.
Home equity: Lines of credit and loans have shorter terms than most mortgages. Plus, home equity lines have a balloon payment at the end. If you have a home equity loan, the rate may be lower by refinancing your mortgage debt.
One couple combined their home equity with their mortgage, resulting in $220 in monthly cost savings. By keeping to their 15-year mortgage-payoff term, they were able to combine all home debt and lived more comfortably financially.
Caution: Do not extend the years left to pay off the mortgage.
Short-term debt:
Credit cards: If you have a big balance or just can’t pay it in full, reach out to your credit card company. Being proactive pays off as companies are lowering interest rates, canceling late fees and offering payment plans to those who ask.
Intermediate debt:
Student loans: The government has plans in place to save you from making payments until 2021.
Car loans: Do not buy a car now that you have a lower home payment. Do not consider a lease — you won’t own it at the end of the lease period. Instead, look at the details. When will your loan be paid off? How much equity do you have in the car? What is the interest rate? What is the car worth? With information, you make better decisions. Knowing what you’re facing makes a difference. Stretching to pay a loan for the next eight months, for example, may make rational sense if you will own the car outright.
2. Talk to your partner and family
Look at this as an opportunity to get your affairs in order with your partner. Let the family know you will have less money to spend. By giving everyone a heads up, you enable them to become part of the solution. It’s easier to say no to the little things, so the bigger expenses do not have to change. When you stand together, this will be easier.
As far as the kids go, you need only go into details depending on their age. “We won’t be going skiing this winter, so what else can we do locally for winter fun?” They are going to be impacted by this change, which won’t go unnoticed. Prepare them.
To increase your family’s comfort level, share some facts: More than half (53%) of people are currently earning half or less of their pre-pandemic income. Let them know that, as a family, you will be OK with a few changes.
Consider the good that may come from this hard work and honest change. One former client told me that, after the breadwinner took a pay cut from a corporate salary to nonprofit work, she began to “like my children even more.” Because she had to say “no” to them more often and their requests, the kids appreciated what they had. She found them to be more compassionate and less entitled — even at only seven and nine years old.
3. Be thoughtful — and ruthless — on how and what to buy
Rethink every purchase. With your new priorities in mind, trade-offs become easier. We may say “no” to getting big gifts for family or friends, but remember we can still pay our mortgage. We can say “no” to some of our favorite clothes and subscription services, but retain Netflix NFLX, -1.12% and Spotify SPOT, +0.61% to soothe our soul. We do not have to like trade-offs. Nor do we have to be perfect on the first try.
Other small steps with a big impact:
• Separate your credit card from Apple AAPL, +5.15% Pay and Amazon AMZN, -0.38%. Reentering or reaching for your card takes more time to check out. This time may make you reconsider if what you are buying is worth the effort. Small changes make a difference. Even deciding to order only from Amazon every two weeks keeps expenses in check.
• Use a debit card more often. You will be spending only what you have. As long as you track your income and outflows, you will know your balances.
• Use cash for certain expenses, such as for coffee and grocery shopping: Typically, I use cash for grocery shopping. I never spend more than I planned because I use only the money in my pocket. (Just be sure to wash your hands after putting the change in your pocket.)
One couple I know created a grand plan based on living on one paycheck. How did they do it? They focused on safety savings if either one of them became unemployed. They tweaked the plan over time.
Here is what they said:
“We actually acted as if it was worse than it was, that way we had “slush” money for the occasional takeout or new shoes. Each month it got progressively better and kept us in tune with what we were spending. With the pandemic and fewer entertainment and eating-out expenses, this was not as difficult as it once was. Though we did have to communicate much more about our plans, I felt we strengthened our financial backbone. And by making it feel like a game we were competing in together, we did not scare or stress out our young kids.”
The world is changing, and there is a lot of fear and uncertainty. Make changes every day to give you a new way of life with the income you do have.
CD Moriarty, CFP, is a columnist for MarketWatch and a personal-finance speaker, writer and coach. She blogs at Money Peace.
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