The problem of reduced pay is prevalent.
Pay may have been reduced by retirement, by one’s being reverted to a lower post from a temporary or acting position, by reduced work hours, or by increases in taxation. So, even before you start to spend on higher costing goods and services, your income has fallen. This article looks at possible responses to earning reduced pay.
First, blessed are those who have been adequately preparing for such a day. They are the smart and wealthy ones. They are the smart ones who have paid attention to the trends in their company, industry and country and have been setting aside funds to suit. They are the wealthy ones who have made financial independence and security their primary focus.
Let us start with a good working definition of personal wealth. A person is wealthy when he has set aside adequate funds in savings and passive income-earning vehicles in order that he is in a position to sustain his lifestyle even if he stops actively working for an income. For such people, reduced pay or even no pay is not a serious threat.
Secondly, for a household where there is a high income, reduced pay may just be a wake-up call. Income is not wealth, and more income does not necessarily mean greater wealth. In fact, there is a negative correlation between income and wealth. That is because more income tends to encourage more expensive lifestyles. High-income households stand a better chance of wealth once their focus is properly redirected.
In fact, wealth building is an available option to everyone who can work and earn adequately.
If reduced pay is an uncomfortable wake-up call, there is no other choice but to avidly seek ways to save on every single expense in order to close the gap between earning and spending levels. It is imperative to put aside funds to build an emergency fund.
An emergency fund should best be at least six months of typical living expenses.
In addition, it is important to get a thorough understanding of your finances. Your personal financial success is directly correlated to the time you invest in considering and planning your money. It is recommended that you seek financial advice. Such assistance is typically available through your credit union, bank and from your insurance company for free.
Ultimately, plan to live well within your means, saving consistently. Once that emergency fund is in place, your next step is to invest according to the level of risk you can tolerate. A relatively sure-fire way of building wealth is to save/invest no less than ten per cent of your before-tax monthly income every month. Such savings need to be in relatively low risk investments and need not be all in cash. For example, “paying yourself first” is a potent spending system that forces you to live on what is left.
The ten per cent saved on this basis may be used to build equity in a mortgage, increase the investment in a retirement plan, or build up the value in an endowment insurance policy.
• Louise Fairsave is a personal financial management adviser, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances.