Adjusting to a Pay Cut

Last week I wrote about cases where taking a pay cut might make sense. This week I want to give some suggestions for how you can adjust to a decrease in pay. Some pay cuts will require no adjustment, or very little. If you take a pay cut but get a shorter commute, move to a lower cost of living area, or get better/cheaper insurance, you may find that your savings offset the loss in pay. For other types of cuts, you may have to make some adjustments.

First and foremost, if the cut will be voluntary (you’re starting a business, changing careers, or taking a sabbatical, for example) save up as much cash as possible before you make the move. This will give you a reserve to fall back on if things don’t go as planned. Other tactics you may have to employ are discussed below.

Downsize: You may have to downsize your lifestyle while you adjust to living on less pay. This can mean small changes like eating out less, dropping services, having a yard sale to raise money, or buying fewer unnecessary items. It may also mean bigger changes such as moving to a smaller home, selling expensive cars for cheaper models, pulling kids out of private schools, or taking fewer/cheaper vacations. The amount of downsizing you’ll need to do will depend upon the amount and duration of the pay cut, as well as how much cash you have in reserve and how close to your income you were living before the cut. If you were living right at the limit of (or above) your income, you’ll probably need to cut back more than the person who was already living frugally.

Move: You may not only need to a move to a smaller house or cheaper neighborhood, you may need to move to another area altogether. This is something that people often don’t want to think about but which may be necessary. You may have to look at lower cost of living areas, especially if you can’t deal with the cut in any other way and you see no chance of your income returning to what it once was.

Prepare to answer questions from potential employers: If you’re intentionally seeking a job that pays less so that you can change careers or work fewer hours, you’re going to have to answer uncomfortable questions form potential employers who think you are likely to bolt for higher paying work. You’ll also have to answer questions in the future from employers who want to know why you left a high paying job for a lower paying one. Your drop in pay will be part of your salary history and you’ll be expected to address that. Have your answers ready and offer an explanation as to why you wanted or were forced to be paid less.

Deal with the emotional fallout: Even if you willingly choose to take a lower paying position it can be hard to adjust emotionally. If you’re used to making $200,000 per year and suddenly you’re working for $50,000, it can make you feel less valuable. Even if you’re enjoying the work and are generally happy, it can still be an adjustment. Don’t define yourself by your paycheck. If you’re happy and able to make a decent living, try to let it go.

Deal with the societal fallout: People who “knew you when” will be curious as to why you are making less. If you’ve chosen this path, they may look at you strangely. People don’t always understand why someone would choose things other than money. Snootier people may look down on you if you sell your McMansion and move into a smaller place so you can do something more meaningful. Even if you are forced into a pay cut, less sympathetic people may ask things like, “So, when do you think you’ll be rejoining the country club?” You’re not obligated to answer any questions. You can simply change the subject or say nothing. If your friends give you too much grief, it may be time to make them former friends. Don’t let people’s opinions bother you.

Taking a pay cut, whether voluntarily or involuntarily, can require some adjustments. Those adjustments may involve more than budgets and numbers. You may have to rethink how you feel about yourself and deal with people who don’t understand your position. This can be unexpected and add to the stress of the situation. Prepare yourself as much as possible to deal with these things and you’ll adjust to your new situation much more easily.

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