How We Prepared Ourselves For A 50% Pay Cut

by Guest Contributor · 19 comments

This is a guest post from Steve, who writes about business and entrepreneurship through his site, My Wife Quit Her Job.  He was nice enough to share his inspiring story with us today, so let him know what you think.

Is there such thing as a secure job? Even if you are a top performer at your current company, is your position truly safe? The harsh reality is that with the current state of the economy, there’s always the imminent possibility that you could lose your day job thus putting your household finances in a major pinch.

Sometimes losing your job is voluntary. Do you hate your current profession? Do you have other priorities? Sometimes, there are more important things in life that require you to quit your day job as well, even if it means taking on additional financial risk.

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 depending 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 some steps that we took in order 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 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 cost upwards of 1.1 million dollars.

Either you can purchase a house in a good school district or you can pay upwards of 12-20k for 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 wedding linens 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 anyways. 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.

Editor’s Note: Please consult your tax accountant before considering any home expense a small business tax deduction as many people get into trouble during audit when they deduct too much.

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 $1800 + $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 your house while your wife is pregnant with your child might sound like a drastic decision. But we did so for several reasons. For one thing, 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 off our taxes because of our small business.

We Cut Out Extraneous Expenses

We track all of our expenses using Quicken. Using Quicken or any other personal finance software allows you to graph and easily find out where all of your hard earned cash is 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 🙂

Editor’s Note: Hey.  I do read these posts you know…

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 have 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.

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{ read the comments below or add one }

  • Georgia Stath says:

    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.

  • phil says:

    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.

  • Melanie says:

    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.

    • Bear says:

      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.

  • TStrump says:

    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.

  • Travis @ CMM says:

    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.

  • Thanks for the comments everyone.

    @Nate
    I think we should all be concerned with any sort of pay cut in general because it has a tremendous impact on retirement savings due to compounding. But you’re right, there’s less risk of survival when you have to take care of less people in your household.

    @Trevor
    THanks buddy. Good to see you here as well

    @ObliviousInvestor
    Good to see you here. Hope you stop on by real soon.

    @CDRates
    Haha. Didn’t catch that pun until you mentioned it. Sounds like you were able to plan ahead as well. We considered a day care as well but decided against it since handling several kids can be really tough. Kudos to you both.

    @Tesla @Curt
    Agree with you both 100%

    @MoneyMonk
    Agreed. Most people want nice cars and pride of owning their own home. Sometimes the numbers just don’t make sense.

    @Veronica
    Yep, it’s definitely doable to have a parent stay at home with the kids. Just takes some amount of upfront work and planning. I’m glad you’ve reached that point.

    @Herbert
    Never too late to start:)

    @DebtGoal
    I didn’t go into too much detail in this post, but yeah, the numbers didn’t add up to own a home. If you factor in deteriorating housing prices, it became a no brainer.

    @Melanie
    I wouldn’t call the bad school districts horrible. Many kids go there and turn out great. But education is a major priority in our household and we are willing to make sacrifices to provide our kids with the best education possible. We are firm believers that a child’s environment is key to the learning process.

    @A Bisht
    Thanks for the kind words.

  • Veronica says:

    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.

  • A Bisht says:

    I’m a regular reader of Steve’s blog and moneyning. It felt great to find Steve’s brilliant write-up here too.

  • Melanie says:

    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.

  • DebtGoal says:

    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.

  • Herbert says:

    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.

  • Veronica says:

    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.

  • Moneymonk says:

    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.

  • Curt says:

    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.

  • Tesla Santos says:

    I agree with everyone that having an emergency fund is key. The safety is exactly why you should have one.

  • CD Rates says:

    “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.

  • “While his haircut turned out okay, I still think that some things are just worth the money :)”

    lol.

    I’m a big fan of Steve’s blog. Cool to have him here for a guest 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

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