Is there such a thing as a secure job in this day and age? Even if you are a top performer at your current company, is your position truly safe if a natural disaster can wipe out your company’s revenue for months at a time? The harsh reality is that with the current state of the economy, there’s always the possibility that you could lose your day job and thus put your household finances in a major pinch.
Sometimes losing your job is voluntary though. Do you hate your current profession? Do you have other priorities? There could be more important things in life that require you to quit your day job, even if it means taking on additional financial risk.
How do you prepare if you are facing a 50% pay cut? I want to share with you how Steve, one of our readers, handled it.
Our Story
I discovered that our household income was going to undergo a 50% pay cut as soon as my wife became pregnant with our child. Why would a pregnancy cost us 50%? Back when my wife and I got married, we both agreed that it was of the utmost importance for at least one parent to stay at home to raise our child. And we decided early on that no matter what the cost, we would find some way to make this happen.
This was an easy decision for us to make when we first got married. But once we both started working and dependent on both of our incomes for survival, quitting the day job all of a sudden seemed like a major sacrifice.
Fortunately, we had some time to plan ahead. Here are the steps we took to prepare ourselves for the eventual pay cut resulting from my wife quitting her job to stay at home with our child. We started planning ahead a year and a half before our daughter was born which was roughly when we started trying for a child.
We Started Our Own Small Business
Running the numbers on a spreadsheet, my wife and I came to the unfortunate conclusion that my one paltry salary was not going to cut it in order to live the way we wanted to live. The main reason for this was because we reside in the Silicon Valley, a ridiculously expensive place to live. To give you an example, a 2,000 square foot shack in a good school district here can easily cost two million dollars.
Either you can purchase a house in a good school district or you can pay upwards of 12-20k for a private school which isn’t economical unless you only have a single child.
In any case, we knew we needed another income stream so we started a business selling online. We started our own business for 3 main reasons.
The first and primary reason was that having a small online business could afford my wife the flexibility of working from home while earning some extra money on the side. Because the store was online, there was very little financial risk involved and there was no need to be physically present at any given location.
The second reason was that there are many tax advantages to running a small business. Even if our business didn’t earn that much income, we would still be able to write off many of the expenses for items that we needed to buy anyway. Expensing various purchases and saving money on our taxes had the indirect effect of amplifying our existing income because we could use tax-free dollars to buy things that were required for both the business and home.
A word of caution: Talk to your tax accountant before you take any home expenses as a small business tax deduction. Many people get into trouble during an audit when they make inappropriate deductions.
The third reason was that my wife and I have always wanted to start our own business. Tired of working for other people, we wanted to call the shots and be in control of our own destinies for a change.
We Sold Our House
At the time, my wife and I lived in a small townhouse that I had purchased shortly after graduating from college. I kind of caught the real estate wave at an inopportune time so I had to really stretch myself in order to afford the house. My mortgage payments were roughly $1,800 + $250 homeowners dues. In addition to this, the property tax was about $500 a month. All told, I was paying about $2,550 a month to live there.
Selling the house while your wife is pregnant might sound like a drastic decision, but we did so for several reasons. First of all, the house was on the small side. We could have lived there with a single child, but space would have been pretty tight.
Second of all, the real estate market was already beginning to deteriorate. If housing prices were flat, it might have made economic sense to keep the townhouse but given the environment, real estate prices were definitely on a downward path.
Finally, because we weren’t sure whether our online business was going to work out or not, we didn’t want to be tied with a huge financial burden in case we needed the money. The townhouse wasn’t going to be our long term house regardless so we ultimately sold the house for a small profit and rented a larger home for $2,200.
By renting, not only did we save about $350 dollars a month but it also allowed us to expense a portion of the rent to reduce our taxes.
We Cut Out Extraneous Expenses
We track all of our expenses using Quicken, personal finance software that allowed us to graph and easily find out where all of our cash was going at the end of the month.
Our highest expense turned out to be from eating out way too much. The main problem was that my wife and I love eating good food but we can’t cook. We knew that we had to force ourselves to eat at home more but we weren’t quite ready to make a complete sacrifice.
To make eating at home tolerable, we started buying dishes from Chinese restaurants and adding extra ingredients to them to make them last longer. For example, if we ordered beef and broccoli, we would buy beef and broccoli from the grocery store and stir fry it in. By adding the same ingredients to a restaurant dish, we were eating tasty Chinese food at a fraction of the cost of going out.
In addition to eating at home more, we also cut back on various entertainment and personal care expenses. Unlike David though, I drew the line at letting my wife cut my hair. While his haircut turned out okay, I still think that some things are just worth the money 🙂
The Outcome
By cutting back on all of our expenses across the board, we were able to shave off nearly 30% of our monthly expenditures. Meanwhile, our online business started taking off as well. Within a year after the launch of our online store, our little business was making more profit than my wife’s previous day job.
Today, my wife happily works at home taking care of our child and we also managed to save a good-sized nest egg in case I lose my job. Whether I ever lose my job or not, the best part is that no one can fire us from our business. We are in complete control of our own destiny.
Should You Worry About Getting A Pay Cut?
The key thing to remember is that no single source of income is completely safe. At some point, you may lose your job or your priorities may change. Among my friends, I would say that about 20% of them have been laid off and are now looking for jobs.
Now’s the time to start cutting back and saving a nest egg in case of emergencies. Now’s the time to establish alternative forms of income in case something happens. Now’s the time to take control of your finances because you never know when you will need the extra cushion.
How would you prepare for a 50% pay cut?
{ read the comments below or add one }
I hope to go down a similar path in the future, I really enjoy the vision of being able to do all my work from home.
The flexibility is nice. Although I feel like working at home isn’t for everyone, now many more people are able to give it a shot. We’ll see how things play out after the stay at home orders are lifted and companies start asking employees to go back to work.
Thanks for a realistic post about Mom’s being able to stay at home with their children. It took me 5 years to get to a point where I could stay at home with my boys and it took a lot of work. When you read about Mom’s quitting work to stay at home in most magazines, the Dad usually has a six figure salary and the solution is that the Mom can stay home because she won’t be paying for daycare, work clothes, and lunches. Not realistic for most. Thanks again. I enjoyed reading.
You are right that not everyone makes six figures with just one income. But with your hard work these past five years, you get to enjoy the fruits of your labor now.
Cheers to that!
My husband and I are pretty safe for as money and income, because we save. So, if a layoff occurs it would not be as catatrophic. We have no debt so this makes it much easier
When you have a car note, mortgage and other expenses that forces both to work. A mortage and two car notes, well you already are overleveraged.
Having no debt provides the ultimate flexibility. Good for you!
As David says, good for you. My question for you is, what happens if everything turns to custard? What if either one of you loses your job? What happens if “both” of you lose your jobs, and a real kicker, at the same time?
How safe are you then?
My observations have been that those who are doing well are generally high spenders who would very quickly end up “off” easy street come a major recession. And if it turned into a depression, ala 1929ish style, then where would they, and by estension you, be?
History, if you read it, is a very great teacher.
I’ve been trying to tell people to prepare for a 50% pay cut for many years. But, few have been willing to listen. Now they are starting to ask questions.
We made the mistake of living on two incomes when we got married. We didn’t think about the consequences at the time, but now we’re wanting to have a baby, and we both want my wife to be able to stay at home. Unfortunately it looks like we won’t be able to do that. The best we can do right now is have her work part-time at her current job. I’m doing everything I can at the moment to pay off as many debts as possible, but looking back I wish we’d planned better.
I have a simple haircut that cannot be messed up and I do it myself. I bought some clippers (good ones) and after 8 months they had paid for themselves. Now it costs me a few cents for the electricity. Great site.
I agree with everyone that having an emergency fund is key. The safety is exactly why you should have one.
Having to pick a house based on a school district or decide that you will pay for private school is a very real thing where I live and I think this is very common in and around our cities. I’m wondering where you live Melanie? I know I picked my home based on the school district long before I even had kids.
“Shave off %30 of expenses” No pun intented, right?.? :O)
We did similar things, although my wife has done some daycare to help with increasing Medical and school costs. At least she still gets to be home. We have been able to cut the number of kids way back which has been good. Daycare does extract quite a price on the family and mom, so not recommended for the faint-of-heart. Great deductions though.
I took on some programming jobs and started working on some online income. That has helped with the ups and downs of a sales job. Thankfully, the last 8-months or so have been great for sales.
Thinking ahead on your part was very smart. We had to play quite a bit of catch-up, but are doing well.
Thanks for the post.
If I new that I had a large emergency fund I would not worry about a pay cut. If I had a large family I would be concerned about a pay cut.
Thanks,
Nate
Agree with you on this. Especially this part “By cutting back on all of our expenses across the board, we were able to shave off nearly 30% of our monthly expenditures. Meanwhile, our online business started taking off as well.” My husband and I had to reach some real decisions to be able to afford to have a child (why is it so difficult these days.) and we started our own online business too.
Well written. I enjoyed your article.
I live in a rural part of Canada where school districts are large and everyone goes to the same school. I didn’t anyone who’d gone to a private school until I got to university and in his case I think it was a waste of his parents’ money (though I’m sure there are plenty of good ones out there).
Education is very important to me too. I just find it sad that people have to pick where they live based on that, effectively making the bad schools even worse by depriving them of strong students.
Melanie,
US schools are finded very differently than Canadian schools – reverse, you might say. The the US, the state and Fed gov’t gives each school a set dollar amt. per pupil, and property taxes make up the rest. High property taxes, high dollar-per-pupil spending, better schools.
In Canada, the provincial and Fed /decide/ how much it costs to educate a pupil, then look at each region’s property taxes, and then make up the cost to the total for each.
The result is that US schools vary hugely in terms of services and quality of teaching and equipment, while in Canada there is substantially less variation.
It’s not the point of the article (which I found generally interesting and helpful) but I can’t get over the comment early on about the school districts. How bad are these schools that going to a “bad school” isn’t even an option? What about the people who do go there? Have they no rights because their parents couldn’t afford the “necessity” that is private school in this case? I just can’t wrap my mind around this.
OK, from New Zealand, and we think the US system of education is quite simply insane. Better school districts get more $$$ per pupil? Not here in NZ. Govt funds based on a decile rating. The lower decile rated schools get extra funding to try and help lift more kids out of poverty by getting a good education.
Now Covid-19 has munted that for a lot of poorer families, with kids who have (had?) a year or two more to go a high school level dropping out because they had to go to work (at supermarkets, as cleaners, at virtually any minimum wage job) to just put food on the table.
So another generation of kids who will go through life on the bones of their bums. And that folks is just so incredibly sad.
Being self-employed, I’m always on the verge of having my income cut drastically.
The only way to survive is to make sure I track my expenses and live within my means.
It’s a drag sometimes but I don’t think I’d have it any other way.
The secret isn’t so much to live within your means. It is to live below your means. Substantially lower.
The Chinese food trick I must try. It’s brilliant. But the real strategy here is so uncommon for someone with financial concerns: deprioritizing home ownership when it simply doesn’t make financial sense.
You’re not only saving a ton of money each month by renting, but also all of the property taxes, insurance, and maintenance costs as well. In short, the financial strain is lessened AND the risk of being caught with an unexpected cost is taken off the table. I only wish more people would accurately crunch the numbers and realize that home ownership — especially in high-cost markets — is unnecessary.
Well done.
The downside of non-home ownership is that you can be moved out at very short notice. And THAT is problematic.
In New Zealand, it was that landlords had to give 45 days notice of termination of tenancy (excluding having the tenancy ended by tenancy tribunal – essentially a lower court), and that has now been extended to 90 days. So that now has landlords up in arms about having bad tenants whom they can’t get rid of.
A classic case of circular reasoning, see reasoning, circular.