When you have small changes in income, such as a reduction in hours or a raise, it’s not hard to adjust your financial goals. Small incremental changes are easy to handle.
But what if you have a big change? What if you switch jobs and get a 20% increase? Or you get a huge promotion that comes with a bonus? Or, especially in these challenging times, lose your job or are forced to take a pay cut?
Those are harder to navigate because they come with a lot of other big changes. Let’s look at both situations and offer up some suggestions on how to best navigate those big deltas.
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How to Manage a Big Decrease in Income
If you experience a significant drop in income, the first step is to understand how that impacts your life on a daily basis.
If you lose your job and file for unemployment, it’s possible that your expenses may exceed your income. If that’s the case, it’s best to look for areas where you can cut back so you can get as close as possible to cash flow positive. At this point, your long-term financial goals may have to be put on pause – and that’s OK. Think of it as a temporary pause until you recover, and don’t let it get you down.
You may need to adjust your goals. Start with lowering your contributions to match the decrease in income. If you experienced a 50% drop in income, drop your contributions by at least half. It’s OK if you want to drop them to zero and take a “wait and see approach.” It’s quite possible that you may see further losses in income, so being cautious is never a bad thing.
For example, if you were contributing $200 a month towards your retirement and you take a 50% pay cut, contribute $100 or less. If things recover, you can always contribute more later to make up for it.
How to Manage a Big Increase in Income
Whenever you get a raise or switch jobs for a big pay increase, look to increase your contributions towards your existing saving goals. This is a great position to be in because you were probably used to a certain budget, and now you have that much more spending power – resist the temptation to spend it!
You can reward yourself a little bit, but look to reward your future self with larger contributions.
For example, if you get a 10% raise, try to increase your contributions by at least 10%. If you can manage it without much hardship, try to earmark half or more of your salary increase towards savings goals.
Let’s say you were making $50,000 a year and received a 10% raise, or $5,000. Try to save at least $2,500 more each year towards your goals, which is a little more than $200 a month.
Remember, you’re used to a certain lifestyle and now, with more income, you can save even more while maintaining that same lifestyle.
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At this point, you may also be tempted to adjust your goals a little bit. You can use Mint to set up and make strides toward your goals. Mint helps you with customizable goals that could help you save for a home, increase your credit score, and more.
If you’re able to save more, it’s sensible to adjust your timelines because you’re more likely to reach them sooner. If the goals don’t rely on anything else, such as the stock market, adjust them as you see fit. If they do, make sure you adjust your entire financial plan and not just pull the deadline closer to you.
A perfect example is your retirement. Your retirement accounts will be invested in the stock market and if your raise means you can retire a year early, make sure your financial plan reflects this. You’ll want to make sure you adjust your asset allocation with the updated retirement time frame as well as your projections. Since it relies on the performance of the stock market, which can be volatile and has a funny way of surprising you, you’ll want to make sure your plan accounts for changes in allocation as you get closer to retirement.
A big change in your income can mean big changes for your savings goals – make sure you adjust them to match any unexpected increases or decreases.
We’ve Got You Covered
If you have experienced a decrease in your income as a result of unemployment, you don’t need to navigate it alone. TurboTax is here with help and advice on everything from managing your day-to-day finances to understanding what this means for your taxes, and you can learn more about unemployment benefits, unemployment insurance and unemployment eligibility during this COVID-19 pandemic at the TurboTax Unemployment Center.