Navigating a No-Bonus Terrain

Many people in the workforce are experiencing pay cuts during the current downturn. I’ve heard from some clients who aren’t expecting a bonus check this year and possibly no salary increase or bonus next year. Normally, when possible, I try to encourage them to live on their salary and to keep the bonus as the gravy in their plan to help save for their financial future.  However, for people in sales positions who generate the bulk of their pay from commissions, that’s not a possibility.

For those experiencing a pay cut or loss of bonus during the pandemic, the financial goal is to weather the storm until it’s over and come out as unscathed as possible.  To that end, here are six tips to help you navigate this new climate to minimize any damage to your long-term wealth:

First, Evaluate Your Monthly Budget

Many of my clients set aside funds for travel this year that will no longer be spent. The trips they planned will be wrapped into next year’s budget, since they only have so much time off. Others are spending less on entertainment, dining out, transportation and even clothes and other personal expenses, such as haircuts. As a result, the typical household may be able to save several thousand dollars this year that can be used to pay for essential expenses.

One of my clients whose salary was cut in half temporarily made a game to see if he can keep his spending within the new salary, even though he had other means to maintain his lifestyle. He told me he was able to accomplish this since he was not eating out as much with friends nor traveling. He said that he plans to eat out even more than normal once his salary comes back … which brings me to my next tip.

Delay Some Spending, If Possible

Hold off on non-essential spending until your income is restored. I have some clients who planned on doing home renovations this year but are now waiting until their salaries and bonuses are restored.  Another client had planned on getting a new car but decided she would wait for now. 

Use That Emergency Fund, If Needed

It is there for that purpose.  When this COVID-19 crisis hit, I checked with my clients to make sure their emergency funds were intact, so that they could avoid having to pull money from their investment portfolios if stock prices were temporarily down.  In these unusual times, it’s OK to use some of the emergency fund, if needed. For those with brokerage accounts, use these funds as your second option.

Consider Reducing 401(k) Contributions Temporarily

If your emergency fund is getting low and there isn’t an investment portfolio to pull from, then it might be time to cut some of your 401(k) contributions.  If possible, leave them at a level that still qualifies you for the company match, assuming there still is one. Many companies have been cutting their match during this crisis in order to be able to afford their employees’ salaries. 

It’s preferable to postpone saving for your future for a little while to help maintain the health of your current financial situation. It’s worse to end up having to have an early distribution from your 401(k), as you may be subject to penalties, along with a tax bill.

Look into Refinancing Your Mortgage

Currently, mortgage rates are very low. A person or couple with a significant amount of equity in their home who needs cash may want to consider a cash-out refinancing or a home equity line of credit (HELOC).  A HELOC currently offers attractive interest rates and is a good way to tide you over until you can be cash flow positive again.

Be Careful with Your Credit Cards

If possible, do not take on any other new debt.  Be leery of using credit cards to pay for any non-essential purchases or racking up any other types of debt with high interest rates. I have seen people dig themselves deep into credit card debt.

The goal is to get through this period relatively unscathed, so you do not totally derail your financial plan. By keeping your expenses in check and finding creative ways to make ends meet now, you will have a stronger financial base to build from later, once the economy and the job market recover.