Despite his hard work and tenure at a top-rated hospitality company, one of my executive clients did not receive a bonus last year and saw a $15,000 cut to his salary due to COVID-19. Unfortunately, he expects to be in the same situation this year and is planning to defer some home renovations and may have to dip into cash reserves if there are any unplanned expenses.
You probably know somebody like this, or you may be in a similar situation yourself. Nearly 1 in 3 adults say that they or someone in their household has taken a pay cut due to the pandemic, according to a recent Pew Research Center study of 13,200 U.S. adults from August 2020. Additionally, 1 in 4 adults say they or somebody from their household has lost a job or been laid off due to the pandemic. Many companies reduced or eliminated bonuses altogether in 2020, and some have already announced similar reductions for 2021.
Perhaps you have been fortunate enough to have kept your job through the pandemic and recession. But faced with a loss in compensation, either through a lower salary or bonus, or fewer stock options, 2021 is not looking much better yet.
As we enter the new year with uncertainty still lingering, I have several recommendations about how to navigate these challenging circumstances. When faced with the potential for less income, it is critical to fully understand the situation and have a strategy to cover any shortfall in funds.
First, Face the Facts
Whether you typically view life as a glass half full or half empty, it is time to be realistic. In recent months, I’ve asked many clients who are corporate executives to provide me with an estimate of their annual bonus. Some initially provide a vague answer, so I challenged their assumptions. For planning purposes, we often concluded that they will likely receive less money than they first thought.
Some at companies that have been hit exceptionally hard by the pandemic have estimated their bonuses may be cut in half this year. To be conservative, I am advising them not to count on that cash flow for any fixed expenses and ensuring that other sources of funding are available in case there is no bonus at all.
Next, it is important not to look at 2021 expenses through rose-colored glasses. If there is uncertainty about future income, do not plan to spend money on a big vacation, new boat or other expensive event when the compensation may not be there. If you typically fund some of these expenses from a bonus that may not be as big this year, the sooner you start planning for that, the better.
Next, Make a Plan
Covering essential expenses with reduced compensation takes planning. It starts with knowing how much money is needed to cover your needs — the mortgage and car payments, food, utilities and insurance.
Next, be careful about expenses labeled as essential. Many executives I work with shifted their discretionary expenses in 2020, spending some money on home improvement projects, but less on travel. Be willing to defer or downsize certain discretionary expenses if you need to make everything fit in your budget.
Perhaps you have been considering a home renovation project that would cost $15,000-$20,000. You could spend down your cash now and replenish that when and if your bonus comes through this year. I caution you to wait until you know your bonus will be paid before you commit to spending down cash. Instead, keep your reserves available for an emergency or unexpected expense.
If Possible, Continue to Save
When income is cut, many people are tempted to dial back their contributions to their savings; they see it as an easy line item to trim. For several reasons, I urge people to stay committed to their savings plan unless absolutely necessary.
First, you don’t want to derail your financial plan — and your future. Next, you could lose the tax benefits of saving in retirement accounts and miss out on the compound interest and market growth. If you decide taking a pause in savings is a must, be strict about resuming these saving habits as quickly as possible. Once your compensation returns to normal, it may be tempting to spend the new gross income. Don’t let that happen.
Find a Way to Cover Budget Shortfalls That May Arise
Unfortunately, not everyone will be able to cover their essential expenses. Some executives may have been spending all that they were earning and are now left with a budget deficit. Others may have experienced unexpected medical or home repair expenses with no infusion of cash from a year-end bonus.
For those with more expenses than income, determine if this situation is temporary or will continue for the foreseeable future. Next, what expenses can be reduced or eliminated? For example, is it possible to cancel lawn care service for six months or drop the monthly wine club? Reducing expenses even by $200-$300 each month will add up quickly.
Next, determine if there may be opportunities for additional income. Finding one consulting job or other part-time work can make a big difference in filling any gaps in your budget.
Try Hard to Avoid These Moves
The objective is to plug the dike until the water recedes and normalcy returns. Here are some additional tips to weather through:
- Falling into the credit card trap: Fight the temptation to leave balances on credit cards. This debt can pile up quickly in a crisis, and with high interest rates it can rapidly snowball out of control.
- Raiding your retirement account: Avoid pulling funds from retirement accounts, due to the penalties (if you are younger than 59½ years old) and taxes levied on these funds. 401(k) loans should also be avoided as, once again, you are taking money from your future self. If you absolutely must pull funds from retirement accounts, check to see if you qualify for any penalty waivers under the CARES act. If you, a spouse, or dependent were diagnosed with COVID-19 or experienced other financial impacts from reduced hours, your situation may be covered. Read more about these exemptions on the IRS website.
With the COVID-19 vaccines continuing to roll out, a potential new stimulus plan from the Biden administration and an improving economy, there is hope on the horizon. Doing your best to manage through these short-term obstacles will make a significant difference in your finances as the pandemic begins to fade away.
Josh Monroe is a CERTIFIED FINANCIAL PLANNER™ practitioner and a Chartered Financial Consultant designee who listens actively and plans thoughtfully to help clients achieve their goals. He joined the CI Brightworth team in 2019 as a Financial Planner. Before CI Brightworth, Josh spent eight years at a leading insurance and investment firm in a variety of roles, including compliance and supervision. Josh is passionate about financial planning and making complex concepts easy to understand.
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