Take 20% Pay Cut

Taking a 20% pay cut.

Now, who would want that?

No one. And it’s (obviously) not a great scenario to be in.

But to be honest, the on-going pandemic and economic lockdown are gradually arm-twisting many companies/sectors to face the hard reality. They will need to cut costs. And if it means job losses or pay cuts then so be it. In fact and atleast temporarily, the new graduates will find it tough in coming months to get great jobs (or even jobs in many industries). Read my quote in Mint regarding the same.

So pay cut may not happen for most of you. But it might happen for many. It is still better than job loss in this scenario. Right?

But think about this: This lockdown would have made you realize one thing – that basic living expenses aren’t very high. It’s the discretionary (and at times unnecessary) expenses that are the real cause of trouble and low savings.

So once things begin to normalize in the post-lockdown world, do you think you can cut down some of your expenses? Or let’s say, can you try and live with just 80% of your income?

Force yourself to imagine that your salary has been cut by 20% for whatever reason you can think of.

And then, ask yourself:

Can I just try to live on 80% of my salary?

With 80% salary, there will obviously be several non-negotiables – like paying rent (or home loan EMI or both), regular household expenses, fees for children, fuel, utility bills, mobile bills, etc.

So for once, just add up these and see whether these amount to less than 80% of your salary. If that’s the case, then you are fairly safe.

But the reason for this post is not to assess whether these essential expenditures are below 80% or not. It’s rather to highlight that if you are able to live on 80% of your income (by spending on essential things), this means that you are capable of saving the remaining 20% of the income.

So are you doing that?

If yes… then good.

But if not… then what’s your problem?

Unless you save, you will simply be just breaking even every month and not move ahead financially. You will never be in a position to achieve your financial goals on time.

I know people who can save 50-60% of their income… easily. And they don’t live a dull or ultra-frugal life.

Then there are many working couples that live on just one paycheck. The income of the other person is used to save and invest vs repay loans. That’s smart. But not everybody would be in such a situation.

But if you really are unable to save 20% of your income, then you are not moving forward in life from the wealth creation perspective. Generally, saving 10% is not enough. You need to save more.

This 80-20 discussion also reminds me of the Pareto Principle. The 20% is for saving. The 80% can be further split into 50% needs + 30% wants. If you are exceeding 80% for needs + wants, then maybe, you are pushing the limits of ‘living beyond your means’. Maybe…and just maybe you need to adjust your lifestyle and strike a balance between spending today vs saving for tomorrow.

And maybe, this lockdown life is the wake-up call that you needed.

Ofcourse, saving 20% or more becomes easier as your income increases. That’s assuming your expenses do not rise as fast the income does.

But many high-earning people are still living paycheck-to-paycheck. That’s not right. They are lucky to be earning well and they should respect their luck. It’s their responsibility to manage their money well.

And saving 20% is not difficult.

I am not telling you to learn how to live on half your salary or to save 90% of your income like this guy does.

It’s just 20%. It’s possible. Many of you are already doing it.

But for those who aren’t, give it a try. A small decrease will not affect your lifestyle much. On the other hand, it will have a big impact on your future wealth. And lower your expense, better your chances of achieving financial independence early (Secret Formula for achieving Financial Freedom fast).

So just for the next few months, imagine that you are earning just 80% of your current salary. And deposit 20% of the salary into some other account.

Push yourself a bit.

See what you are missing. And be honest with yourself when judging whether you are actually facing any difficulty or it was just your apprehension that you couldn’t live on less.

Many regular people have managed to save extraordinary amounts of money. Maybe, this idea of living on just 80% of your income is the exact eye-opener that many of you needed. 🙂

Adopting the mindset that you earn 20% less than your current income will help you keep your expenses in check.

Try it.

And when you are done with 20%, go for more….

An easy to remember and commonly quoted thumb rule is to Save Your Age. So if you are in your 20s, then you need to save 20% of your income. In the 30s, you should be parking away 30% of your income and so on.

And for those who are already saving more than 20% – even you guys can try to save a bit more. For example – if you earn Rs 2 lac a month and are saving 20% (i.e. Rs 40,000) every month, just imagine that you are earning Rs 1.6 lac. Now see if you can additionally save 20% of that. That is 32,000. So in total, you try to save 40K+32K=72K which is 36% of your income. I know you are cursing me. That’s fine.

And before I end, please understand that although I am talking about saving 20% of your income in this post, please don’t walk away with the lesson that you only need to save a certain percentage.

The best way to manage and invest money is to know how much to invest for each financial goal.

Some bit of discipline and common sense will get you started. But if you are still confused, do take help of professional investment advisors. A good financial planning exercise can really sort out your financial life.

But I also do understand that everyone’s financial situation is different and there is no one size fits all. But no matter what, you need to take the financial responsibility for managing your money correctly.

And if you still haven’t figured it out, it’s best to begin by saving something.

And 20% is a decent target to begin with. This way, you will slowly build the habit of saving and once you start making more money or lower your expenses (somehow), your savings rate percentage will improve automatically.

So don’t wait to earn more to begin saving. Just focus on saving 20% of whatever you earn first. Take action in this direction and you are sure to figure out how to achieve all your financial goals and financial freedom eventually.