There are specific instances when you should ALWAYS take a pay cut. The situations are when all is lost and there truly isn’t really anything else you can do to get yourself out of the situation. Your mental health is worth far more than any amount of dollars you can have in your pocket.
In my previous pay cut article, I said to almost never take a pay cut. However, there are times when you should. Although I had an opportunity to take lower pay, I’m glad that I avoided the situation altogether. I heavily discounted the amount of options that I have under my disposal.
However, sometimes, there really aren’t any options left. I saw a prior boss who was willing to take a pay cut from salary to $0. She was just about the submit her resignation letter before the company swerved at the last second and retained her. There truly are situations when there is nothing else you can do.
Therefore, if you have the option of switching ship to another company, then you should take it. Even at the expense of losing out on more money. It’s not an ideal situation but many of your job satisfaction is dependent on factors that you don’t control.
You may have a boss that you just don’t get along with or coworkers who are openly ready to backstab you at any second. In this situation, the only thing you can control are your own two feet to walk out of the room and the company. You shouldn’t have to focus on other things besides the job itself.
However, there are times when people force you to move your attention and focus to them which makes you miserable, in turn.
What Does it Mean to Take a Pay Cut?
Taking a pay cut means that you are voluntarily moving to a new company that offers less pay. This doesn’t apply to situations when your current company is instituting lower pay due to economic conditions. This situation applies to if you have a job offer in your hand that is offering less compensation.
The reason why this situation only applies to when you already have a job offer with lower pay is because you have a choice. If the lower pay is due to economic conditions, your current company will not give you a choice. It’s either a take it or leave it offer that they give.
The lower pay doesn’t just apply to salary, either. You could be offered lower compensation in terms of bonus, 401(k) matching, HSA matching, vacation time, and the like. If the company’s compensation structure is less beneficial to you as an employee, then it means that it’s lower pay.
For example, my current company matches approximately 9% of my salary (including bonus) into a 401(k) program. I had another company offering only $1,500 for the entire year of 401(k) matching! That’s an important pay discrepancy that I had to consider before thinking about the job offer.
Read the fine print carefully and compare the two benefit programs that you are considering. There is a good chance that it may not actually have been a salary increase but rather a salary decrease. Especially when you consider the benefits package.
Benefit packages are usually standardized across companies. However, that doesn’t mean that they are identical. Some companies just offer wildly better benefits than other companies. Watch out for yourself and read the fine print. Don’t let them slide it past you.
When Should You Take a Pay Cut?
So now, you are wondering, well, when does it make sense to get a pay reduction for a new job? The one time that you should take a pay cut is when you are SMASHING that social share button and posting to your favorite social media! Your friends may be wondering when they should ever accept lower pay.
It’s a completely free thing to share an article for your friends to be more educated about their career and finances. Therefore, if it means your friends’ lives better by just sharing an article then it sounds like a no-brainer to do so. Let’s share the knowledge!
So with that said, let’s go into when taking a reduction in pay is worth it.
1) Take a Pay Cut If The New Job is Truly and Objectively Better
Evaluate and look over your interview process. Did you like your soon-to-be boss? What about your potential coworkers? Did they seem happy or did you see them put in a lot of effort to look happy? If one of the reasons you are considering a chance is the work culture, evaluate this with a fine tooth comb.
Another factor in deciding if the job is objectively better is to think about the job itself. Is it what you want to do? Is it completely different to what you are doing currently? Remember that it’s not as easy to leave an industry and come back to it if you find out you don’t like it.
However, it’s not as hard to change jobs if there are similar transferable skills related to job responsibilities. I currently work in credit analysis. It’s not as difficult for me to move to another company that needs credit analysis skills that I learned over the years.
Evaluate the job objectively and truly make sure that the new opportunity is better. If it is, then there is nothing wrong with taking a pay cut.
2) You Are Absolutely Miserable With Truly No More Options
There are times when you truly have no more options. You tried everything. Maybe your boss was making you absolutely miserable so you moved up the chain to complain to the boss’ boss. Then when that didn’t work, maybe you moved up to HR. Then after that didn’t work, you moved up the chain once more.
At that point, there really isn’t anything more that you can do. Short of threatening legal action, the company made it absolutely clear that they aren’t interested in helping you. It means that it’s a take it or leave it offer. It’s quite literally their best offer so the only option is for you to stay or leave the company.
If there truly are absolutely no more options for you to take, then it’s not a bad idea to take a pay cut. Remember to actually exhaust all your options before considering this route. When something seems impossible, there’s usually just something that you’re missing.
However, if that’s not the case, then you should take the greener pastures route and go for it.
3) You Completely Want to Switch Industries
There are times when you can get a foot in the door at an industry that you absolutely want to get into. However, the only catch is that you would take a pay cut. If this is the case, then it’s not a bad idea to go for it. Maybe you are in sales and after trying it out, you want to move into finance.
Or maybe you are in a technology oriented role and you want to move more into the business world. One of my prior bosses moved from public accounting into banking. I’m not sure how he did it given that he was in public accounting for so long. However, he made it work and there’s no reason why you can’t make it work either.
With less experience at a particular industry, it’s not uncommon for the new job to offer less money. Then it’s up to you to decide if you think the change in industries is completely worth it. It sometimes is. It’s a way for you to take a short term time lag in exchange for long term gains.
4) You Get Something You Want in Return
There are certain times when you don’t mind taking a pay cut. For example, if the new company offers for you to take Fridays off in exchange for a 20% reduction in pay, then it’s a fair deal. Some companies are receptive to this option because it means they don’t have to pay full time benefits.
However, if you have a spouse that already covers the family benefits, then you really don’t lose out on anything. The company wins because they not only have to cut your pay by 20%, they don’t have to pay benefits. You win because you get a 20% reduction in pay while still having benefits.
It’s a win-win situation. Therefore, if a new company offers part time work for full time pay, then the reduction in pay is well worth it. Remember that just because your pay is cut by 50%, that doesn’t mean your workload will be cut by 50%. You will have to negotiate this upfront.
Don’t take a 50% reduction in pay only to find out you will work the same, if not more hours. That’s not a good deal for you.
How to Prepare to Take a Pay Cut
So then now that you decided to take the new job, it’s time to figure out how to prepare for it. Your lifestyle will change, especially with a new job, depending on the percentage pay cut and your current nest egg. Therefore, these are the steps that you can take.
1) Project Your Finances and Budget
The great thing about W-2 employment is that the salary is fixed. If your expenses are relatively fixed month over month, then it’s not hard to project your finances into the future. You can easily project out and budget how your new life will look like.
Of course, there will be miscellaneous expenses that won’t be consistent month over month. However, you can add in a buffer account to account for this expense. There may be some corners that you may need to cut if you want to meet a set savings goal. Maybe you don’t eat out every so often anymore.
This is one of the things to look out for when you are taking a pay cut. Your monthly budget will look different from where you are enjoying today. If the difference is very little and you’re not going to notice a huge difference in lifestyle, then great! If the difference is a lot, then it’s time to prepare and think about ways to adjust to it.
2) Do Your Homework on the New Opportunity
To prepare to take a pay cut, do as much research as you can on the new opportunity. Some companies will do or say whatever they need to say in order to get you to join. It’s almost sickening at times. They will talk about how great their city is and how great the company culture is.
How employees are loyal and they won’t leave because of how great it is. Do very good research on the new opportunity, the department, and the people. You don’t want mismatched expectations, you want to get what you expected to get.
When there is a mismatch between reality and expectations is when you’re going to have problems. It’s not good for you and it’s not good for the company who’ll now have to go through with the interview process all over again. Check Glassdoor, media articles, and any other way that you can get information on.
Unbiased review of the job and work culture is important.
3) Be Honest With Yourself
Understand yourself very well. Will you truly be happier earning less money? Even if you say “the money doesn’t matter to me that much”, are you really that type of a person? I used to think that I was that type of a person. That my nest egg will take care of me, so it really doesn’t matter how much I get paid.
However, I can’t imagine how I would have felt if I took a lower paying job in exchange for better perceived work life balance. I had the opportunity to take a pay cut from $102,000 all the way down to $70,000. Looking back on it now, I thank my lucky stars that I backed out at the last second.
Happiness does matter to me. However, the ability to do what I want, when I want it in the future matters to me even more. That’s when I know I’ll be truly happy. Working on projects that I want to work on, not projects that I have to work on. With a sizable nest egg, I know that I am just around the corner in financial independence.
Which is when I can truly start working on passion projects. I don’t mind going through the motions for a couple of years before landing in that coveted spot.
There’s Nothing Wrong with Taking a Pay Cut
Taking a pay cut does not mean that you lost. It means that you were redirected to another path and opportunity. It may actually turn out to be an even better financial decision in the long run. You’ll never know the results of it until you go through the motions and find out for yourself.
If you get into another job that is more aligned with your passions, your performance could reflect your newfound happiness. A job is not all about the money either. Therefore, if you will truly be happy with the new job, then there’s nothing wrong with getting paid less.
Instead of thinking about the short term losses, think about the long term gains that you may have. Your sanity and happiness is worth a lot of money as well. If you are happy, there’s no need to spend extra money on medical and healthcare such as on a therapist or on a doctor.
I’ve seen so many people in their 20’s that have white hair already. The stress of the job and the home life is beginning to get to them. They are working like crazy and I can’t imagine just how much worse their health will be in five years or so.
These are the kinds of people who are willing to take a pay reduction in exchange for better balance. Life is so much more than money and at some point, the money becomes very old. Take care of other things that are worth more than money first. Then you can worry about getting it back afterwards.
Who knows, maybe with a new job with better working conditions, you may just start a side hustle that brings you millions a year. You just never know.
