Taking a pay cut so you can make a career change or avoid a long period of unemployment can be a smart move at times, but it can also backfire.
After the excitement of winning a new job wears off, a pay cut can lead to distracting financial stress that takes your mind off work. With unemployment figures down, you may be better off continuing your job search.
Here are some key questions to answer when evaluating a job offer that comes with a pay cut. If a pay cut will cause a hardship, it’s possible to find work-arounds, but you’ll need to plan ahead.
- How much of my income will go to housing?
If you live in a high-cost city like Palo Alto or New York, it may be hard to keep your housing costs at 30% or less of your household income, the marker the U.S. Census Bureau uses to determine if housing is affordable. That said, if you end up spending 50% or more of your income for housing—often the biggest line item in people’s budgets—you could find yourself investing mental energy that should go into your work in more mundane matters, like making ends meet.
Do the math to see where you’ll stand. If you are thinking about relocating to take a new gig, use Sperling’s Best Places to find out the median home price and other costs, so you can calculate realistically.
If you find that an employer’s offer will put you in the red, try to negotiate it—and don’t be afraid to mention local housing costs. Even a $5,000 increase can make a difference. Or, if you are considering an out of state job that will raise your cost of housing, ask if there is a full-time telecommuting option. Staying where you are could minimize the pain of a pay cut. If you can’t negotiate a big enough pay increase, secure the right to do some consulting or other work on the side for noncompeting companies, so you can make yourself whole. Otherwise, you may find that once you’re working in a new job, you are forced to move to a community where housing costs are lower.
- What will I spend on healthcare?
If you’ve gotten lucky and found an employer that covers 100% of premiums, the pay cut may not cause as much pain as you think. That will make it easier to say yes to the job.
Generally, though, that is not the case. More companies are passing along healthcare costs to employees. Before you accept any offer, ask for written information on the company’s healthcare plan. Many companies will let you talk with someone in human resources about the options they offer. Then figure out exactly what your costs will be.
If, say, you will have to pay $1,000 toward your premiums for a family policy–something companies don’t tend to trumpet in their offer packets but that is increasingly common–or absorb high co-pays and a big deductible– you may, essentially, be taking a bigger pay cut than you think. Given rising healthcare costs, what you contribute to them will likely rise, not shrink, over time.
If you do have to take a hit on healthcare costs, find out if there are any benefits that offset them, such as a tax-advantaged flexible spending account for healthcare expenses. If the math still works against you, you may need to negotiate for more pay, secure the right to moonlight or freelance, or make other lifestyle changes, so you don’t regret taking the job.
- What are transportation costs?
A job offer that comes with a pay cut might actually save you money if you’re trading a 90-minute commute for a 15-minute one where you can bike to work in good weather. That’s especially true if you have young children and have to pay a sitter or childcare facility for every hour you’re not home.
Don’t guestimate at what your commuting costs will be when evaluating an offer. If you plan to drive, go to Ridshareonline.com and use the calculator to find out what your commute will run you. Expect to take the train or bus? The American Public Transit Association’s site links to state transportation associations, where you can get information on what monthly commuting costs will be. You can estimate any increased childcare costs, if you don’t already know them, by using data from ChildCare Aware of America’s recent report on the subject.
Inquire about telecommuting if it turns out your commuting costs will heighten the impact of a pay cut or a cheaper commute won’t offset a lower salary. Telecommuting one or two days a week could make a big difference in your ability to accept a new job.
Employers will expect 100% of your attention and energy when you’re at work—and a pay cut that brings new stress to your life or makes you resentful can prevent that. Make sure you can give a new employer a killer effort by looking realistically at how your compensation will affect your lifestyle. It’s possible to reduce the financial impact of a pay cut, but you have to be proactive about it and think creatively.