What will your 2% pay cut mean for you?

You arrive at work tomorrow morning and  your boss announces that in 15 minutes everyone needs to meet in the conference room. He announces that effective immediately all employees will be receiving 2% pay cut. What do you do? Will you be fine or will you be feeling a pinch? How do you adjust?

Taxes are going upsocial security tax increase

Effectively this is reality for most of us. But wait you say. Do you know something I don’t? Well actually the truth is most of us will be getting a 2% pay cut starting this month. One of the decisions made by Congress in the fiscal cliff deal, was they allowed the temporary cut in social security tax to expire. That means effective January 1 your Social Security tax rate will increase from 4.2% to 6.2%.

A couple of years ago when we struggling to recover from the recession as part of the efforts to get the economy moving again Congress and the President passed a stimulus bill that included a 2% reduction in the Social Security taxes. So by allowing that to expire Congress technically isn’t really raising taxes. The problem is we have gotten used to having that extra 2% in our pay, so for most of us when we cash that first check in January it is going to feel an awful lot like we got that 2% pay cut.

So what does 2% really mean?

Let’s say your household income is $60,000 per year. 2 percent of $60,000 would be $1,200 a year. That means you can expect to have about $100 less to spend each month. How many of us have an extra $100 a month that we can lose and not even notice? Probably not many of us.

So the question is what are you going to do about it?

This is why budgets are really important. You need to have a plan. Unfortunately, printing more money isn’t an option for us. So if our income goes down by $100 (or whatever the 2% means for your income) you have to cut something by $100. Time to get that budget out and see what can be cut.

Maybe it’s cutting back on little expenses like going out to eat at lunch. Maybe you need to look at bills like your cable or phone. Are there options you could cut back on? Perhaps you might need to slow your debt payments just a little, but I really encourage you to try to find ways to cut back without doing that.

What you don’t want to be is a normal American. Here is the “plan” I expect most people to follow. They will find their paycheck a little smaller, but they won’t really change anything. The end of the month will come and they will find themselves a little short. And what will happen? Time to pull out the plastic. And as each month of 2013 goes by, the credit card balance will creep up a little more.

Have a plan

Please don’t be normal. Unfortunately, taxes are a way of life. Not much we can do about that. But we can choose how we spend what we bring home. If that 2% increase is going to leave you in a bind, decide now what you will cut. Don’t wake up on January 1, 2014 with another $1,000 or more of credit card debt.

What is your plan?

Photo credit: 401(k) 2013 ( creative commons)

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