Monday, March 16, 2009

My Hypothetical 20% Pay-Cut Challenge

I've been talking to former colleagues who've already been laid off by my company. Few lucky ones have been able to find jobs with equivalent pay and comparable benefits, but most have taken jobs with pay cuts and fewer benefits. I asked how much of a pay cut they took, but none were willing to discuss specific figures. (I'm a bit ashamed of being so tacky and nosy, but I was curious for my own sake.)

It's not unheard of unemployed workers now taking 30%-70% pay cuts in their new jobs. In this article, one former bank employee went from a $125,000 salary to a $66,000 salary. Another former mortgage lender went from earning $110,000 to $33,000.




I'm relatively confident that based upon the industry that I'm in, I probably won't face such a dramatic salary decrease in my next job. But I AM expecting to take a significant hit in my salary, so I spent the weekend thinking how I'd deal with a hypothetical 20% pay-cut.

EXPENSES
I've concluded that I want to continue to maintain my current standard of living, so I'm not going to alter my spending, even in the face of a 20% pay cut. Fact of the matter is, I'm living a pretty frugal life right now. It's not like I'm living the high-life by subscribing to premium cable channels, drinking expensive wine, dining out regularly, buying Starbucks coffee, etc.

The big bulk of my expenses are eaten up by rent and debt repayment. The rest of my budget is quite modest. Although I'm open to the idea of a roommate, I'm not yet at the point where I am willing to share my living quarters with a stranger. With respect to my debt, my credit card should be paid-off by year end. However, I want to continue with my debt snowball plan and roll the credit card payments into my student loans. In other words, paying off my credit card really doesn't give me much relief.

Some people have suggested that I eliminate my cable TV/high-speed internet service/land line service. This is a great idea, but I'm not inclined to eliminate my internet service since I do a lot of online banking and I do not want to do so on a shared computer in a public place. Although I don't need cable TV, it's my primary source of entertainment, and I'm not going to give it up so easily. I also like having my land line, since out-of-state calls to my parents and big sis are included in the monthly flat fee.

INCOME ADJUSTMENTS
It's a bit depressing that a 20% pay cut will set me back to where I was in 2004. Looking at my 2004 paycheck, I've estimated what my take-home pay will be after taxes and other expenses. I then took out some expenditures that will help bring my take-home pay to what it is now.

% of Current Paycheck% of Pay-Cut Paycheck
Fed'l Income Tax15.01%16.25%
Social Security6.15%6.21%
Medicare1.44%1.45%
CA Income Tax5.04%5.60%
CA SUI/SDI Tax1.09%1.18%
FSA0.51%0.63%
ESOP3.0%0.00%
Long Term Disability Ins.0.55%0.00%
Personal Accident Ins.0.09%0.00%
Pre-Tax Dental0.13%0.38%
Pre-Tax Medical1.06%3.09%
401k15.00%2.00%


Through this exercise, I've concluded that I need to do the following:
  • Eliminate my ESOP contributions;
  • Eliminate long-term disability insurance coverage;
  • Eliminate personal accident insurance coverage;
  • Reduce my 401k contribution from 15% pre-tax to 2% (ouch).

I've also discovered that my current company's medical and dental benefits are cheap compared to other employers'. Based upon what my big sister is currently paying for her medical and dental benefits, I'm anticipating that these costs could easily increase 3x.

It pains me to have to dramatically reduce my 401k contribution and savings rate, especially at a time where I can dollar-cost average my retirement investments cheaply. But at least I have the comfort of knowing that I won't be sacrificing the pace of my debt elimination. Once my debts are paid off (hopefully before 2014), I'll boost my 401k contribution at such time.

Oh, what a fun exercise this was...

8 comments:

Miss M said...

It's a good exercise to do and now you know that while it's painful to take a pay cut you will survive. I think it's great that you contribute so much to your 401k right now, I'm only at 8%. That leaves less room to cut back. Our ESOP plan is different, you don't buy shares they are given to you. Is layoff definite?

Shtinkykat said...

Yes. I can't discuss the issues surrounding the layoffs, but my company has made it clear that they will continue to lay off people. It's not a matter of if, it's a matter of when for me.

paranoidasteroid said...

I can't speak for everyone, but when I said drop internet/TV/phone, I meant if you were laid off & unable to find work. & I know it's not ideal, but I'd scale back the debt snowball as well and make sure I had a cushion.

Don't get too stressed about the layoff, though. Perform well at your job, and whether it happens or not will be outside your control. You're doing much better that other people just by considering the possibilty and not being too frozen by fear to have a plan.

Sharon Rose said...

Hi there-a very good evalution my dear, very painful but forward planning like this gives a true picture and gets you used to how things may be-good luck with things.

MoneyMateKate said...

I've been living on a 1/3 reduced income for the past 5-6 months. Basically, my retirement investments are going to suffer. Hah, like they're not ALREADY suffering!

Abigail said...

I think this is a good exercise. Especially if you may go on unemployment.

As far as entertainment goes, especially when you are home a lot, I think cable and internet tend to be excellent investments. It's one of the few luxuries Tim and I have. If we hadn't had that plus Blockbuster Online, there's no way we would both still be alive. I realized the other day: It's been 10 months of two people being home (generally all day, every day) in a one-bedroom apartment.

So for us cable and internet would definitely be the last things to go. Blockbuster Online would go before them, but it would be one of those things that I'd fight for til the bitter end.

jpkittie said...

Wow - that was good for you to see what would change for you. That really sucks that you are going to end up without your job. good for you for taking measures now to make it a lot less of a shock. hang in there

Anonymous said...

Hey are you a professional journalist? This article is very well written, as compared to most other blogs i saw today….
anyhow thanks for the good read!