How We Prepared for a 50% Pay Cut


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?

 


Originally posted at https://moneyning.com/money-stories/how-we-prepared-ourselves-for-a-50-pay-cut/

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