If you believe that money equals happiness, then willingly accepting a pay cut may sound like a straight path to gloom and doom. But as it turns out, some people who trade their higher-paying job for one with a lower salary end up "happier," said The Wall Street Journal. Though a lower income obviously entails reworking the budget, it also "can come with a raise in free time and work-life balance."
Still, "while a better work-life balance may benefit your mental health," said USA Today, "taking a pay cut could negatively impact your financial health," which is obviously important as well.
When can it make sense to take a pay cut?
Even though it will mean less money to work with, there still are instances where taking a pay cut can, well, pay off.
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For example, if you want to get into another industry or are realizing long-term advancement opportunities are not likely in the field you are in, you might accept a role with lower pay. When "you're starting out on the ground floor of a new industry, or your new position requires retraining or additional credentials, you may need to accept lower pay for the time being," said Money Crashers — though overall, it "could be a net positive for your career prospects."
Another scenario where accepting a job with a smaller paycheck might make sense is if it offers better benefits, which are surprisingly valuable. "If someone has a job paying $100,000 but doesn't have great health insurance, their family could end up paying $10,000 out of pocket in health insurance costs each year," said USA Today, whereas if they "switched to a job at a state university with better insurance and college-cost benefits, they could come out ahead — even if the job paid less, say, $80,000 a year."
The time-off benefits of different jobs also matter — particularly if you have a family or need to care for a loved one. More PTO could end up having financial perks, too, such as you needing to rely less on childcare and outside help.
What should you consider before agreeing to a pay cut?
Before you give your notice, take a step back to make sure this is really the right move for you.
"The first thing is to ask yourself why you want to leave your current job," as this "ensures you don't make a rash decision you'll later regret," said CNBC. If you're burned out or simply have too much on your plate, you may be able to work with your employer to find a solution rather than throwing in the towel altogether.
Next up is "looking at your current budget and financial goals and seeing if you can still make them work on a smaller income," said CNBC. If switching jobs will mean overhauling your budget, consider "living as though you've already taken the pay cut for a few months to see how it works out."
In addition to the nitty-gritty of monthly budgeting, you should also factor in how a reduced income will impact your long-term financial goals. For example, said CNBC, "if you're saving up for a house or plan on having a baby, how will your new income change the timelines on those milestones? If it will take longer, is it worth it to you to wait?"
How can you adjust to living on a lower income?
If you do decide a pay cut is worth it, you will need to make some adjustments. Here are a few steps to help ensure you stay on track financially:
Make sure everyone in your household is on board. "If you're part of a family, you should also consult the other members in your household," said CNBC, which "means talking with your spouse and children about what changes would take place."
Determine areas where you are comfortable cutting back. Less income means less money to spend. As such, you will need to determine areas to cut back, whether it be meals out, streaming subscriptions or vacations.
Figure out how you can continue working toward your savings goal. Even when earning less, it is still important to stay on top of your larger financial goals. As you are budgeting, determine how to keep saving, even when you're bringing in less.
