When Does It Make Sense to Take a Pay Cut?

May 23, 2012

Last week I told you that Susan and I celebrated our seventeenth wedding anniversary, and to commemorate the occasion, I recalled some of the financial milestones we’ve accomplished along the way.  One might think that as a financial planner my financial road has always been straight, but as I reflected on some of the steps I’ve taken forward, it also occurred to me that at times I’ve had to take a step or two back. For example, there have been several times throughout my career where I’ve had to take a pay cut. Whether it is by chance or by choice, you may be faced with the same decision someday. Here are a few reasons why taking a pay cut may be the right decision at the right time:

To take a different career path

My first job out of college was working for an insurance company in their 401(k) and pension division as a 401(k) enrollment specialist. I worked in a field office that wholesaled qualified plans to plan sponsors, and my primary responsibility was to sign up participants in their 401(k) plans. The job gave me an opportunity to get my feet wet and to gain professional experience (not to mention my insurance license).

While I felt as though I made decent money for just getting started, it was clear that the “real” money was being made by the men and women that actually sold the plans (the “wholesalers”). Within three years I was promoted to internal sales support, and I was on the fast track to becoming a wholesaler myself. There was just one problem: I didn’t want to be a wholesaler. Wholesalers were under a lot of pressure to sell product, and while it came with a nice paycheck, the idea of being under constant pressure to achieve sales goals did not appeal to me. At that moment I realized that I was heading down the wrong career path, and I needed to get off.

My neighbor told me that her company was hiring personal financial advisors, and that was the break I needed. I was interested in the job, but there was one caveat: taking it would mean a 33% pay cut. I didn’t want to reduce my income, but it was either that or stay in an industry I didn’t enjoy. Sometimes to take two steps forward we must take one step back, and in this instance it felt more like three or four, but it was the only way to keep a bad situation from getting worse, while opening up a new opportunity to move forward.

To spend more time with your family

One of the benefits of starting down this new career path was having more flexibility in where I lived. Wholesaling usually requires working in the territory for a number of years in order to build up a viable flow of business, but as a financial advisor, I could take on new clients wherever I went, or so I thought. In Illinois, I worked within 20 minutes of my office, and my client’s lived all around me, but when circumstances lead us to relocate to California in 2002, I had to commute over 2.5 hours a day in and out of San Francisco if I wanted to keep my job. This put a heavy strain on my family, and after a year I decided that I needed a change.

I knew that I was in the right industry, but I needed to be closer to home in order to spend more time with my wife and kids. A friend worked for a local bank that was looking for new recruits to be junior financial advisors. I had already worked four years in the business, and I certainly did not consider myself a “junior” advisor, but if I wanted to be closer to home, I’d have to swallow my pride and bite the bullet of another pay cut.

Being close to home allowed me to watch the kids head off to school each morning, enjoy an occasional lunch with my wife, and even coach Rachel and David’s soccer teams. The pay cut would eventually end up being too much for us to handle, but as I look back I can honestly say I wouldn’t trade those family moments for anything.

To keep your job

I’ve been working for my current employer for six years, and while my household has grown, as have my expenses, my income has remained fairly level. Now you might not equate this to a pay cut, but when you consider how much the cost of living has gone up, it starts to feel that way. I might be tempted to jump ship and head for “greener pastures,” but before I do I must consider a few things. One, unemployment is around 8%, so finding other opportunities may not be as easy today as they were in the past. Two, what I lack in pay increases I can make up for in fiscal responsibility (i.e. managing the income I have better). And three, this is exactly where I want to be. This is the career path I’ve chosen, and in this job I can see the kids off to school, I can have lunch with my wife, and I can coach Ethan and Jacob’s soccer teams. Even if it meant a temporary pay cut (I hope my boss isn’t reading this), I’d like to think that it’d be worth it just to keep doing what I’m doing.

Now don’t get me wrong; this isn’t a charity, and I don’t work for free, but don’t let the idea that you can’t afford a pay cut keep you from making the right decision at the right time, especially if in the end it gets you to a better place.