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Experiencing pay-cut? Here’s how you can Manage a Reduced Income

The increase in income encourages you to develop a habit to buy expensive things. When you can afford luxury, living in its absence becomes near impossible. Therefore, experiencing pay-cuts makes you question your ability to survive with a reduced income.

Considering this, preparing for the reduction in monthly income is crucial. There are many factors that influence your monthly earnings. It may be that your partner moved out, or you suffered a pay-cut due to increasing company expenses, or that your two-income household converted to a single-income zone due to the COVID-19 pandemic.

How To Manage Your Reduced Income

Whatever the reason may be, unlearning your luxurious ways is a difficult process. If you have recently suffered from a drop in income, refer to the ensuing guide. While the course of adjustment may be tough, it is not entirely impossible.

Analyse the situation

The biggest mistake you can make, after experiencing a reduction in your income, is to panic. Although it is stressful to deal with the apprehension of not being able to make ends meet, getting tangled up in a frantic mindset can negatively affect the way in which you tackle the issue.

Taking this into consideration, the first thing you need to do is calm down, so you can proficiently analyse the situation. To do this, employ some grounding techniques, breathing exercises, yoga or mindful meditation, so you can take a healthy approach in dealing with mental stress.

Once your body is liberated from its anxious state, take the next step, which is analysing the situation. Analysing the financial state is crucial, as it enables you to learn about the shortfall between income and spending. To thoroughly identify this gap, the following steps can be followed:

Step 1: Assess the difference in income

Taking a proactive approach to managing a reduced income can save you from panicking at a later stage. Essentially, you should start creating a money management plan, from the moment you learn about the reduction in income. The first thing you need to do is assess the total difference in your monthly earnings. Subtract the new income from the previous income, so you can identify the number from your expenses figure that you need to eliminate from your monthly budget. Once you discover this amount, creating a compensation plan can be easy. This scheme can include ideas revolving around cutting costs or finding other sources of income.

Step 2: Calculate your monthly expenses

The subsequent step is to highlight the total monthly costs. This calculation must be the aggregate costs of the essentials, voluntary expenses, as well as your debts and investment payments. The essentials include the “survival” items that you cannot live without. For instance, your rent, utility payments, internet bills, and groceries fall in the category of essentials. Similarly, voluntary expenses include spending on items that you can live without. For example, shopping for clothing can fall into this category. When you have a reduced income, making sacrifices in the voluntary expenses would be absolutely necessary. Once your monthly expenses are identified, the next step can be carried out.

Step 3: Highlight the discrepancy between income and expenditure

At this stage, you have two amounts. The new income, and the total expenditure. If the expenditure is more than the new and reduced income, then you would have to cut costs or increase the monthly income. However, if both the numbers align, or if the income is more than the expenditure, you would not have to make many modifications in the new budget.

Step 4: Establish a plan of action

The final stage of planning and analysing is establishing a plan of action. It is imperative to determine a methodological approach to move forward with the reduced revenue. At this stage, you must decide whether you wish to increase your income, decrease your expenses, or (ideally) do both. When you have a provisional plan, you can move forward confidently, without the added apprehension that concerns the uncertainty of the future.

Create a new budget To Manage Low Income

Even the slightest change in income should be met with the creation of a new budget. Particularly, when you experience a reduction in your monthly earnings, it is imperative that you learn to budget money on low income and also to make slight adjustments to ensure that you do not run out of money before making any obligatory payments.

However, creating a traditional budget is not always applicable after a pay cut. When you apply the traditional budgeting strategy, the money is only allocated to different areas of spending. The budget itself does not impose any restrictions or limitations that urge to stop your typical spending habits. As a result, it is imperative to create a zero-based budget or an envelope budget, after you have received a pay-cut

What is a Zero-Based Budget?

A zero-based budget is a spending plan, which is formulated around the idea that every pound you make, must have a purpose. Hence, your income must be segregated in a manner that enables you to only spend the money in the way that it is intended to be spent. To create this budget, you are required to calculate your total income, along with your total expenses. Once this is established, the subsequent step is to create the budget. If you wish to create a zero-based budget, follow the ensuing tips:

  • Divide your income into categories. These may include groceries, utility payments, rent, debt, investments, etc
  • Calculate the total monthly cost for each category and assign a value to each subdivision
  • If you have any money remaining, add the category of “savings” or “emergency fund” to assign a purpose
  • Calculate the total amount for each category. In the zero-based budget, the total expenditure should be equal to the total income. Considering this, when you calculate the difference, the answer would be zero

Zero-based budgets are ideal, after a reduction in income, as they limit the spending. If you spend more in one area, you would run out of money in the other area. Hence, this budgeting technique certifies a degree of discipline in the disbursement of income.

What is an Envelope Budget?

Parallel to the zero-based budget, the envelope technique adds a certain degree of limitations to prevent you from spending excessively. An envelope budget performs this function by limiting your spending through digital means. This strategy requires you to deal with cash, therefore, the possibility of making impulsive purchases with a credit or debit card is reduced. Like all other budgets, creating an envelope budget requires calculating the total income, as well as the total monthly expenditure. Once these values are identified, take the following initiatives.

  • Divide your income into categories. These may include groceries, utility payments, rent, debt, investments, etc
  • Purchase a packet of envelopes and write the category name on each envelope
  • Assign a value to each category of monthly spending
  • Once you get paid, withdraw your monthly salary
  • Deposit the amount in each envelope, and seal it
  • When you make any purchase, extract the cash from the dedicated envelope

This budgeting strategy is extremely helpful when you are dealing with a reduced income. In addition to preventing you from making spur-of-the-moment purchase decisions, it gives you a reality-check regarding how much money you have left. As a result, you take a methodological approach to spending.

Discover ways to bring in an additional income

With a reduced income, you can either cut expenses or discover ways to increase your income. However, if you work a full-time job, finding the energy to freelance, or to take up another job, would be difficult. Additionally, if you push yourself beyond your capabilities, the quality of work at your day job may suffer as well as your overall health.

Considering this, you are required to find ways to bring in additional income, which are easy, convenient and do not require much effort.  The following enumerates the easy methods to generate additional revenue.

Rent your Spare Bedroom

The most convenient method of bringing in an additional income is placing the extra space in your home on rent. If you have a spare bedroom in your house or flat, renting it out can generate a hefty revenue. However, before placing a room on rent, learn about the different schemes offered to renters. For instance, with the Rent a Room scheme, you are not required to pay tax on the first £7,500 of your annual income. Although, if your income is less than this amount, you are liberated from the responsibility of paying taxes. Similarly, if the income is higher than £7,500, completing a tax return is essential.

Rent Storage Space

Similar to renting a room, renting a storage space can also generate some extra revenue. With platforms like Stashbee, you can place your attic, garage, warehouse or loft on rent. This platform encourages you to upload pictures of the space, along with its dimension and its address, so the people near you can benefit from it. By renting a storage space, you can earn around £150- £2000, depending on the dimensions and location of the space.

Sell old Clothes (by the kilo)

There are several ‘cash for clothes’ companies in the UK, which give you cash, in exchange for old clothes. Essentially, if you are looking to make ends meet, selling your old and unloved clothing items can provide you with the additional income, required for survival. With that said, this method can only be applied once or twice, therefore, it does not offer a steady solution.

Sell old Books

You can also sell old books to increase the month’s income.  Any old book collecting dust in your library can be sold on the Amazon marketplace, which can return you with a good amount. With that said, Amazon only permits you to list 35 books per month. If you wish to add more, a fee of 75p, per book, in addition to the 15% of total price (and postage cost) would be charged. On Amazon, hardbacks are sold at a higher price, whereas old paperbacks fail to bring high revenue. In addition to Amazon, you can also sell books on eBay, We Buy Books and Ziffit.

Rent your Parking area

Another way to generate revenue, without putting in much effort, is by renting your parking space. Parking is a severe problem in majority of the cities, therefore, if you live near a popular tourist destination, renting a parking space can return you with a decent income on a consistent basis. With that said, you can still rent your parking space in regions that are not as popular. In order to make this happen, use platforms like Stashbee, Just Park, Parklet and Your Parking Space. Depending on the popularity of the location and the size of the space, the income of £90+ can be earned from renting out the parking area. With this approach, you can also earn a steady, monthly income, depending on the person you are renting to.

Attend Focus Groups

If you are an opinionated person, use it to your advantage. There are several organisations that hold focus groups, which return you with money, in exchange for your honest opinions. Market researchers can provide you with £50-£150, for your valuable opinion. To start this venture, sign up with an agency that can pair you up with researchers looking for your demographic. Roots Research is one agency that recruits participants for focus groups.

Complete Surveys

Completing online surveys is another way to earn money. With this approach, you are required to answer a few questions to help researchers formulate a hypothesis for preliminary or market research. Use multiple platforms, such as One Poll, Survey Junkie, and Life Points, to fill out the forms. However, this method does not provide a large sum of money, in contrast to the other methods.

Participate in a Psychological Experiment

Participating in psychological research is an intriguing way of earning money. Contrary to popular belief, participating in these researches does not cause any physical or psychological harm. In fact, researchers in the field are bound by ethical obligations, which make these experiments completely safe. For instance, researchers may carry out a study to assess the way in which you respond to olfactory cues. These experiments can pay around £10 for a session. However, you can only participate, if you meet the experiment’s inclusion criteria. To find a recent and relevant experiment, search for advertisements presented by the psychology departments of well-known universities.

Discover ways to cut costs

With a reduced income, it is crucial to cut back on some of your expenses. After treating yourself to the finest brands, switching back to old habits can be difficult. However, in order to survive, and stick to your budget, finding ways to eliminate unnecessary expenses is essential. Use the following tips to reduce your spending.

Use Cash-back Credit Cards

Cash-back credit cards return you with money when you use the credit card to make a purchase. Some of these cards can return up to 5% of what you spent after you make the purchase. These cards are a great way to save money, however, it is imperative to select the right card for yourself. Cash-back credit cards are only worth the money if the percentage rate of return is higher than the cost of the card. As most card companies have a signup fee and an annual fee, the cost of owning the card surpasses the benefits it offers. Therefore, if you are thinking about getting a cash-back credit card, carry out comprehensive research on the options available.

Use Price Comparison websites

When you are on a budget, it is essential to make astute financial decisions. Considering this, you can use price comparison websites to ensure that you get the best deal for your money. These websites can inform you about the most economical products and services in your area, and educate you on whether you are opting for the right deal. From car insurance to retail products, the right website can provide you with a detailed analysis of the most affordable products. Some of the most popular price comparison websites include Google Shopping, Yahoo Shopping, CamelCamelCamel.com and Confused.com.

Ditch expensive brands

In order to cut back on your spending, you may have to compromise on purchasing your favourite brands. In the case of grocery shopping, cut cost by purchasing generic brands, or the super market’s own brand. These products are affordable, and they often come at a discounted rate. Moreover, to save money, print out coupons for the grocery stores near you, and use it to save money. With strategic coupon use, you can save hundreds of pounds in grocery shopping.

Cook at home

Eating out can drain your budget. Taking this into consideration, it is imperative to learn the art of cooking at home. It is much cheaper to buy ingredients and transform them into healthy food items. If you are not savvy in the kitchen, look for simply 3 to 5 step recipes to help you prepare delicious meals at home. These recipes can be found on numerous cooking channels on YouTube. Additionally, you can also use platforms like Super Cook, when you are scarce for ingredients. With this platform, you can select the ingredients that are available in your home to find exclusive recipes that only use those items.

Make bulk purchases

Buying in bulk is the traditional way of saving money. In doing so, you can get discounted items, which can last for a few weeks or even a month.  With that said, it is imperative to avoid being tricked into purchasing products you do not need. Additionally, if you are investing in a two-for-one deal, make sure to check the date of expiration before making a purchase.

Use public transport

Commuting to work is another expense that drains up the budget. With a reduced income, you can save the commute expenses by switching to public transport. However, if the thought of using public buses makes you uncomfortable, using ride-sharing applications, such as Uber Pool, can be beneficial.

Get a free energy audit

Unexpected and high utility bills can also drain out your bank account. Taking this into consideration, it is essential to get a free energy audit. This audit can help you gauge an understanding of how much energy you are consuming. If there are any discrepancies in the billing, you can get the issue sorted. Moreover, having this knowledge would also make you more aware of your energy consumption. Hence, this would motivate you to limit your energy usage. To get an energy audit for free, visit the website for Energy Saving Trust to see the eligibility criteria.

Avoid taking Loans

When you are short on cash, the most rational thought is usually to take out a loan to make ends meet. However, this strategy can cause more harm than good. When you take out a loan, the obligation of returning the money- with interest, comes with it. With an already reduced income, making the repayments becomes difficult.

Due to the inability of making regular return payments, you can end up in huge amounts of debts, which can ruin your credit score. Taking this into consideration, it is essential to avoid taking loans, especially after a pay cut.

Instead, you can apply for the government’s low-income schemes, if you are struggling financially. In the case you are eligible for the ensuing schemes, register yourself instantly. In the UK, the following programs are offered to individuals with low-income.

  • Housing Benefits
  • Working and child tax credits
  • Pension Credit
  • Income Support
  • Income-related Employment and Support Allowance (Only valid for pregnant women)
  • Universal Credit (Only valid for households that earn less than £408 a month)
  • Discretionary Housing Payment (DHP)
  • Disability Living Allowance (DLA)
  • Personal Independence Payment (PIP)

Conclusion

Running a household after experiencing a pay cut is not easy. With that said, surviving on a low income is still very much possible. To start off, you must calculate the total gap in income, create a new budget and subsequently, make the decision to increase your income and cut down the unnecessary expenses. Essentially, you must stay away from taking loans, as it can lend you a huge amount of debt. All in all, when you experience a pay-cut, remain calm, and spend wisely.

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