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Budgeting for the Sequester: How to Handle a 20% Pay Cut

If you're a federal worker facing the prospect of unpaid furlough days this year, you're probably already worrying about how you'll live with a 20 percent cut in your income. But federal workers aren't the only ones who may have to radically alter their budgets to accommodate a drop in their take-home pay. Civilian employees of government agencies and contractors are also seeing shrinking paychecks these days. And plenty of hourly employees in the private sector have seen their hours trimmed back in recent years as businesses reduced hours, renegotiated contracts, or implemented furloughs of their own.

And of course, a pay cut can be a matter of your own choice: If you're in a two-income family and one spouse transitions to part-time work to take care of the kids, the decline you experience could easily be even steeper than our furloughed public workers face.

Naturally, those who have robust savings accounts and assets can handle such a pay cut more easily than those with fewer resources. But research from shows that 27 percent of Americans have no emergency savings at all, and 76 percent don't have enough savings to cover their expenses for six months.

Even if you're in the well-prepared minority, you'll still need to make budget adjustments to accommodate your newly reduced income.

Crunching the Numbers

"When a reduction in income takes place, it's important to list out everywhere you regularly spend money each month and then determine if that spending item is a need or want," says Larry Rosenthal, a certified financial planner and president of Rosenthal Wealth Management Group in Manassas, Va. "Most people will be able to temporarily suspend some of the 'want' spending each month until their income bounces back."

Bruce McClary, director of media relations for ClearPoint Credit Counseling Solutions in Seattle and a credit counselor for 15 years, says that the average annual household income in the U.S. was $51,404 in March 2013. A reduction of 20 percent would reduce that to $41,124, which means they would need to reduce their spending by $10,281 per year, or about $857 per month. (That's all before taxes, of course.)

"The average savings rate is 3.2 percent, although that's far less than the recommended minimum of 10 percent," says McClary. "A household earning $51,404 would be saving $137 per month at the average savings rate. They should continue to save at least that much even after a pay cut."

Rosenthal says federal employees, even if they decide to temporarily reduce their contributions to their retirement savings, must make sure they contribute at least 5 percent to their Thrift Savings Plan, because that's the amount the government matches.

Cost-Cutting Measures

"Start with discretionary variables and some essentials such as your cable TV, cellphone, Internet, magazine subscriptions, groceries, gasoline," says McClary. "It's possible, if you're not already cutting costs to the core, to make most of your cuts in these categories. Cable TV is prohibitively expensive for people on a shoestring budget, and there are plenty of other alternatives. A cable bundle, after removing all of the gimmicky sales promotions and temporary discounts, could run as much as $145 per month. Strip the cable and landline phone from that bundle, and Internet can be as low as $35 per month. You just saved $110 per month."

You can also save by switching your phone plans. Kimberly Foss, a certified financial planner, founder and president of Empyrion Wealth Management in Roseville, Calif., recommends disconnecting your landline.

"Moving all my phone use to my unlimited cellphone [plan] saved me an average of $67 per month, which comes to $804 a year in savings," says Foss. "If you work from home and need a landline, consider a VoIP or cable phone service, which are considerably less than traditional lines."

McClary says that, depending on your current cellphone contract, you may be able to shop around for a new plan.

"Cutting a contract plan with a top provider and going with a discount competitor could save you as much as 50 percent depending on your contract," says McClary. He recently had clients switch from two individual phone plans that cost a total of $160 a month to a pay-as-you-go, bundled family plan that cost $70.

You may also be able to save by shopping around for new car, or life or homeowners insurance, says Rosenthal. It's also possible to lower your car and homeowners insurance premiums by raising your deductibles, but be sure you have the cash on hand to pay that deductible in case you end up with a claim.

"You can save money on medical expenses by switching to a high-deductible health insurance plan," says Foss. "If you can put the savings from your health insurance premiums into a health savings account and use the HSA to pay for doctor bills, that helps reduce your monthly budget. Unlike a Flexible Savings Account, if you don't use all of the funds in the HSA at the end of the year, you don't lose it: It can stay there until retirement."

Other Items That Eat Up Your Budget

An obvious place to make some immediate changes to your bottom line is to reduce the number of meals and snacks you buy at restaurants, coffee shops, and convenience stores. Even if you spend as little as $5 per day, that comes to about $150 per month.

"Food accounts for about 12 percent of the average household budget, says McClary. "Let's say our average family is spending $514 per month, and let's figure that coupons are not utilized in this budget. The average coupon user saves 12 percent per year, so if we were to cut out the fancy brands and use coupons, we could save almost $62 each month."

Transportation costs, especially when gas prices are high, make up an average of 16 percent of household budgets, says McClary: The average family spends $685 per month.

"The range of savings here could vary significantly depending on your circumstances and the choices you make," says McClary. "Use gas discounts through grocery and retail reward programs, limit driving to necessary trips, and combine travel with others. If you're able to have one fewer trip to the gas station and a lower insurance premium, you can save about $100 monthly just for that."

If you're facing a 20 percent pay cut, hopefully you'll find a way to generate additional income for your household. Get a part-time job on your mandatory days off if you can, and ask family members to help by getting a job or doing side jobs for cash.

"Create income from a hobby or skill," suggests Anissa Schultz, director of education and enrollment at the Credit Advisors Foundation in Scottsdale, Ariz. "Use social media to advertise your skills or services like dog walking, babysitting, tutoring, carpentry, lawn mowing, or pool cleaning."
Until your income recovers, you'll need to aggressively follow a leaner spending plan.

Michele Lerner is a contributor to The Motley Fool.

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Last jobs report: Sixty percent (60%) of the 170K jobs created were minimum wage jobs. If people are making $7.25/hour, what's going to be the outlook for investors and the stock market?

Texas, for example, has the highest numbers and percentages of minumum wage jobs in the nation. What will be the long-term out look for these economies?

August 17 2013 at 6:10 PM Report abuse rate up rate down Reply
Thomas Stieglitz

Didn't I just read yesterday that 80% of working age people in this country are currently dealing with poverty of some sort? I'm sorry for the suggested 20% pay cut but at least they are still going to get paid--I know it's hard to scale back, but it can be done.

July 29 2013 at 12:03 PM Report abuse +1 rate up rate down Reply

Let the commie Obama and his commie cronies stay in office, and watch things get even worse in this country. Detroit on a national scale.

July 29 2013 at 11:11 AM Report abuse +2 rate up rate down Reply
1 reply to cpenrod's comment

Obama and his commie croonies have a lot planned for us. They think that we haven't seen the light yet. But we have. The ones that haven't are the so called stars in hollywood that think if they back him, they're safe.

July 29 2013 at 12:35 PM Report abuse -1 rate up rate down Reply

What we need is something we can sell to the rest of the world.
Could it be sunlight?
Could it be oil?
Could it be wind?
Could it be gas?
Could it be foodstamps?
Could it be coal?

July 29 2013 at 10:26 AM Report abuse rate up rate down Reply

And yet Obamacare isn't good enough for them-that is, if you believe Congress and the IRS, etc. My heart bleeds.

July 29 2013 at 9:41 AM Report abuse rate up rate down Reply

Spare me the sympathy for the poor underpaid federal paper shuflers who support the regulations that undermine the efforts of the Private Sector to grow out of Obama's fiscal disaster.

Even USA Today admits that the average federal worker makes well over 30% more in direct compensation and benefits compared to his equivcvalent in the Private Sector. Yet we have to pay these yahoos even when they do not add to the nation's productivity.

And when the NSA, IRS, D of J and State department demonstrate the corruption and complete lack of transparency as apparently desitred by this administration i see the hell with them all. We need a big reform and clean up effort at the deferal level to balance compensation appropriately and also to bring consequences to wrong doers.

July 29 2013 at 9:40 AM Report abuse +1 rate up rate down Reply

Thanks to President Obama for giving millions to Syria. Then Billions to Africa. Thanks President Obama for Sequestering American. NOT. What is wrong with this picture? President Obama does not care about Americans. Too busy caring about other countries.

July 29 2013 at 9:37 AM Report abuse -1 rate up rate down Reply

Something wrong with this survey 27 percent of people have no emergency funds and 76 percent can not cover six months of expenses. This equals 103% of the people, must be some new math.

July 29 2013 at 9:35 AM Report abuse rate up rate down Reply

You can make up the 20% cut in your pay a multitude of ways without paying in any income tax. My friend cuts grass at 40 dollars a yard! There are many ways to supplement your income!! I mean without selling drugs!

July 29 2013 at 9:21 AM Report abuse +1 rate up rate down Reply

So federal employees are set to lose one day a week all year? I believe that's an out right lie. Which makes this whole article false.

July 29 2013 at 9:17 AM Report abuse +1 rate up rate down Reply