Coping with the January pay-cut

For Ms. Loonie and me, tomorrow is the first payday of the new year. In Canada, the year's first paycheque is often substantially smaller than the last pay of the previous year, since it marks the return of our good friends CPP and EI. For those who haven't had the pleasure, these payroll deductions are used to fund government-provided pension and unemployment insurance, respectively. For 2008, the deductions are as follows:

• CPP - 4.95% of annual earnings in excess of $3,500, to an annual maximum of $2,049.30


• EI - 1.73% of annual earnings, to an annual maximum of $711.03

Once you've reached the annual maximum, the deductions stop, so you effectively get a pay raise around half-way through the year. The problem is that, if you get used to this increased income, it's a bit of a shock to the system when the deductions start again in January. Even if you have a year-end raise, unless it's an increase of 15% or more, your January paycheque will be smaller than its December predecessor.

How to deal with this "pay cut"? Ideally, you would base your spending around this diminished income, and have the discipline to save the extra that you earn after maxing out the deductions. Then, when January rolls around again, you're already spending less than you earn, and have built up a substantial cushion of savings. This takes a lot of discipline, but it puts you in great financial shape.

As for us, we have some room for reductions in several budget categories, so I'm making small cuts here and there to make up the difference. Since the Emergency Fund is already above $1,000, I'm reducing the bi-weekly contributions to $10. Our (modest) budget for eating out is also being cut. The good news is that, after having a cash-only Christmas, we don't need to spend January playing catch-up. I am also receiving my year-end bonus tomorrow, so that helps to ease the pain of a diminished paycheque.

UPDATE - The January "pay cut" only applies to Canadians who earn more than $41,100 per year. I completely overlooked this point when I originally wrote this post, and I should apologize for that. File this "pay cut" under "problems I'm fortunate to have".