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.
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.
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 Tax||15.01%||16.25%|
|CA Income Tax||5.04%||5.60%|
|CA SUI/SDI Tax||1.09%||1.18%|
|Long Term Disability Ins.||0.55%||0.00%|
|Personal Accident Ins.||0.09%||0.00%|
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...