How to handle a pay cut

How to handle a pay cut

As I write this, Covid-19 panic is sweeping the world, and sweeping away jobs as it travels. At the latest count, the USA is probably posting is the highest unemployment rate in 87 years, with at least 26 million people filing for various forms of jobless support. This implies around 23% of the workforce is unemployed.

Here in the Gulf, there are predictions of at least a 10% drop in the population of Dubai, as over 200,000 Indian nationals, not to mention all the other nationalities have signed up to be repatriated from the UAE.

Basically, things don’t look good. And if you’ve got a solid job, you’re one of the fortunate ones. If you haven’t even been hit with a pay cut then you’re extremely fortunate.

I’ve been given about a 50% pay cut, so I’m living this out right now. And I’m very fortunate and thankful to still have a job. Many friends of mine will not be so lucky.

What should I do if I’ve been given a pay cut?

If you’ve been given a pay cut then all of the assumptions that make up your normal financial plans go out the window. Your budget has been shot to pieces, so that is where you should start. You need to assess exactly where you are, and how to make a plan for going forward.

Remember the simple rule that governs all your personal finances?


That is your aim. If you can do that, you’ll be alright. If not, you need to make some pretty drastic changes to your life, and do it quickly.

This is how I would do it.

Nail your budget

You need to draw up two major lists. One is your budget. How much is coming in, and how much is going out.

I’ve given you an example to copy in a google sheet here.

List your money coming in, and predict it for the next 3 months. If you have any form of variable pay then predict it pessimistically. (I get paid by the hour when I’m at work. At the moment, I’m predicting working zero hours for the next few months.) If you are expecting a pay cut, then factor that in.

Now list all your expenses. List them by category and average out what you expect to be spending in each one of them, every month. The best way to predict this is simply to dig out your bank and credit card statements from the past 3 months, and go through them line by line assigning each transaction to a category. Assume you’ll spend the same in the next 3 months as you spent in the last 3. (Hopefully you’ll spend less, but again, if you plan pessimistically you should be on the safe side.)

This does require a bit of work, but pour yourself a big cup of coffee and get it done. It’s time well spent

At the bottom, compare the income with the expenses and see how it looks.

It should look something like this:

Example of a simple budget

List your assets and liabilities

The other list I would make is one of my assets and liabilities. This is particularly important if you have any significant outstanding debts. If you list all of your assets on one side and your liabilities on the other, you can draw up a picture of where you stand, and how exposed you are.

(In sheet 2 of the ‘Example Budget’ over here you’ve got an example to copy.)

Compare the two columns and see whether you have net positive or negative assets. This gives you an idea of what you can fall back on if you don’t have any income coming in.

It might be a good idea to also add up the assets which are ‘liquid’ (you can easily turn them into cash). This might be useful if you find yourself in a tight spot and suddenly need to sell things to free up extra cash.

In this example the liquid assets would be cash in savings accounts, possibly investments, and vehicles. (Note, list only what you could actually sell the vehicles for, not what you think they’re worth!)

Do you have an emergency fund?

If that list of assets & liabilities contains a nice amount of cash sat in a savings account somewhere, that you’ve tucked away for emergencies, that’s great. Maybe just have a think though whether you are happy with that amount. If your job prospects have suddenly taken a turn for the worse though, maybe now is a time to try and increase your safety margins if you can.

If you have no idea what an emergency fund is, and you definitely don’t have one, you need to read all about them over here. It’s important. Do it now.

Are you earning enough?

Now have a look at your budget. With your reduced pay, are you still earning more than your expenses? If you are, then the pressure’s off. You just have a reduced excess in your budget, so you’ll probably be saving or investing a bit less, but its hardly the end of the world. You can just make a few adjustments to your expenses and boost your savings back up, if that’s your priority.

If however, your income has dropped below your expenses, its time to make some changes. How far it has dropped will define how aggressive your changes will have to be. If your earnings are a long way below your outgoings, your response will have to be drastic.

To put it bluntly, you will have to slash your outgoings. Go through your budget step by step and see what can possibly be changed.


You may have to work out your priorities. If it helps, list all the categories in the expenses section, without their respective values next to them, and just work out what’s most important to you, and the things that are least important, perhaps could be cut back.

Big-Ticket Items

Big-ticket items are things like rent, school, loan repayments, remittances, savings, and groceries. They are likely to be high on your priority list, but also the ones that if you do adjust them, they could make the biggest difference to your situation. Some you may not be able to change immediately, but are still worth pursuing, e.g. downsizing your rent when your contract is next up for renewal.

Everything is negotiable. In particular, for those of you with children in school, it’s worth speaking to the school’s finance department. Many schools at the moment (in our part of the world, where almost all education is fee-paying and private) have offered temporary discounts or payment plans for tuition fees. But if you are in severe financial distress, speak directly to the school management and lay out your position. They may well be able to make an exception for you and come to some arrangement.

Food & Groceries

But what else can you change? Smaller habits can still make a big difference. Food, for example. Cooking your own is going to be cheaper than ordering delivery. And dining in, is the new dining out! Even adjusting where you shop can help. One simple tool, which will also help you be healthy, is to plan your meals for the week. We’ve been doing that and it has drastically helped us cut our food waste. We’ve also been using grocery delivery services, which force us to plan ahead.

You don’t need Netflix

As unbelievable as it may sound, you don’t need 4 different subscriptions for watching movies online. In fact, you don’t need any. If you are desperate enough, you’ll use that time to try and upskill and work out some new ways of earning an income instead of lying on the sofa. So cancel Netflix. And Prime. And all the others.

I actually just found a useful program for tracking all of your subscriptions. It’s called “TrackMySubs”. Last time I checked, it was free. You can get it over here.

(A good place to learn some cool ways to try and earn an extra income, and one that I like to listen to is Nick Loper over on the Side Hustle Nation blog & podcast. He’s written a monster post with 150+ ways to earn extra income.)

Credit Card Debt

This can be a massive drain on your monthly budget. If you don’t get rid of that balance that is on your credit card, that you just roll over from month to month, only making the minimum payments against it, you are wasting money.

In the example assets & liabilities sheet, I have listed credit card debt as 15,000 dhs. The minimum payments being made against that debt, of 650 per month. This is a monthly expense that doesn’t need to be there. Credit card debt is also particularly dangerous. It can easily act like a cancerous growth, feeding off you and draining your resources, growing until it’s out of control.

You need to get rid of it. Right now.

In the example I showed, I would use the money in the savings account AND from the vehicles, to clear that credit card debt. I would sell the vehicles and use that cash, plus half of the savings, to clear the credit card. Yes I wouldn’t have a car for a while, but I also wouldn’t have the expensive credit card debt either. And I could get rid of the car insurance, servicing, maintenance and registration fees. Drastic, but necessary.

If credit card (or any other form of high interest rate consumer) debt is a problem for you, then you need to plan your way out of it. Three 4 steps should hopefully help you on your way.

4 steps to clear your credit card

cutting up credit card
  1. Stop digging. If you are not clearing the entire outstanding balance every month, by paying off the whole statement, you are accumulating or rolling over debt. Stop digging yourself into a deeper hole and just stop using the card.
  2. Prioritise. When you look at your budget, you need to put your debt almost at the top of the pile when it comes to payment priorities. Make yourself give up other things in order to pay off the debt.
  3. Plan to overpay. If you have a debt of, let’s say 15,000dhs, the minimum payment on that debt would be about 5-600dhs per month. But if you just make the minimum payment, then the interest that will accrue at, say 3% per month (which is not unusual) will be about another 450dhs. Putting you right back where you started. If however, you paid about 3000dhs per month, without using the card for anything else, you could clear your debt in about 6 months.
  4. Look for extra sources of cash. Whether it’s taking extra shifts, doing some babysitting, odd jobs for a friend with a business, or selling your possessions on that Facebook group, the more cash you can find to throw at this debt, the faster you will clear it. So get radical. Get rid of stuff, and clear that debt!


This is a delicate one, but also something that’s important to think about.

Many of us move abroad, to earn more than we could back home. We often send some of what we earn back to families or other causes that we support. Whilst this is commendable, it can also become a burden. Some people end up feeling like a “cash cow” for their families, and feel the pressure of having to provide for them.

The reality is that if you have suffered a drop in your earnings, you may have to adjust what you are sending home too. If you maintain the same level of remittances, on a reduced income, you may be stretching yourself beyond your means, and even risk going in to debt to fund those payments.

Whilst I’m sure that your motives are well-intentioned, providing for your loved ones, you also need to protect yourself. If you start borrowing money, to fund someone else’s lifestyle, you really could get yourself into trouble very quickly. (See a good example here.)

If you have to adjust your lifestyle, it is reasonable to expect that those that you are providing for might also have to adjust theirs. The trick is how to tell them and help them manage it.

In my opinion, honesty is always the best policy. And better sooner rather than later. If you delay speaking to your family, they may never realise the pressure you are under. But if you lay it out to them, explaining exactly what’s happened, they can hopefully work with you to get through this time. You are not in this alone, so much better to share the burden.

Apps for tracking spending

Apps for tracking your budget might really help. A quick glance through the app store show some really great tools to help you.

YNAB, Fudget, Spending Tracker, and Thrifty all sit near the top of the recommended list in the iOS app store. They all do slightly different things, but at the end of the day they’re all handy, useful tools that you’re likely to have on you, to help you keep track of and stick to a budget, even on the move.

I’ve used some of them successfully, but also just a good old spreadsheet. Google Sheets or Excel, whatever floats your boat. They’re all just ways of you recording your spending as you go along.

Good old cash

Cash envelope system

In this germ-conscious environment, fewer and fewer people are using cash. (Whether or not that’s a good thing is a debate for another day.) But if you are the sort of person that likes to spend with cash, but has trouble keeping to a budget, you could always use the “Cash Envelopes” system.

Simply withdraw from your bank, the amount you have allocated for the month ahead, in cash, and place it in different envelopes. One envelope for each different sector of your budget. When you’ve spent all the money in that envelope, it’s all gone and you’re not allowed to add any more. Severe? Maybe. Effective? Definitely. It really helps focus your mind, and develop your budget following habits.

Review and plan for the future

All of this cutting back is difficult. Reigning in your spending can only be pushed so far. Focus as well on trying to increase your earnings if you can. Actively hunt down other ways of earning extra.

You’re a resilient person and you will get through this. I know that this particular phase of life that you’re going through may feel unending, but there will be light at the end of the tunnel. It will end and things will improve, if you can just keep your chin up and keep going.

Maybe you will have to adjust your expectations. Maybe your financial plan lies in ruins after all these setbacks. Well, get back up, dust yourself off and start counting your blessings. There’s always someone worse off than you. And maybe you need to consider the possibility of a different financial destination to the one you envisaged.

Could you possibly be happy with less?

Maybe instead of focussing on the negatives, on all the things that you won’t have now, you could instead maybe take this opportunity to become a bit more minimalist. Take more pleasure in the simple things of life rather than the material. Less, sometimes can be more, and wealth definitely does not equal happiness.

If your future looks slightly less “wealthy”, then don’t worry. Just fill it with other things. People, smiles, memories and laughter. At the end of the day, it’s only money. And there’s a lot more to life than that.

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