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By Jill Schlesinger
October 25, 2016

As the labor market continues to firm up, you may start to look for better opportunities. And while most people define “better” as “better paid,” the paycheck isn’t always the best reason to jump ship.

There are a few times that taking a pay cut makes sense.

  • Your boss (or company, or role) stinks. If you are miserable in your current work environment, or report to someone who’s a terrible manager, you’re comparing cash vs. sanity — and in that case, sanity often comes out ahead.
  • You want to get onto a different ladder. You may also move sideways or take a slightly lower pay package because you can get a much better opportunity for long-term growth elsewhere. If a rival company would pay for another benefit that you value, like graduate school, you could use that to position yourself for success further down the road.
  • You need more flexibility. This often comes up for new parents, many of whom would give up some percentage of their salary for more flexibility at work. How much would it be worth to you to work from home a couple of days a week? What would it mean for your work-life balance if you could reduce your hour-and-a-half commute to a 10-minute walk? If you’re approaching retirement, by contrast, you might also want to phase down your work hours but keep high-quality health insurance — another reason to trade away higher pay.

Calculate First, Move Second

Regardless of why you are considering a lateral (or downward) move or agreeing to a pay cut, don’t make a decision without looking at your existing expenses, and understanding what a pay cut would mean for your cash flow. You may need to adjust your spending and perhaps even consider downsizing certain aspects of your life.

If you have a bit of lead time, beef up your emergency reserve fund while you’re still making more money. While the rule of thumb is to accumulate six to 12 months of expenses, you may want to set aside some extra cash if you’re going to be making less.

Finally, make sure that the reduction in income won’t blow up your longer-term savings plans — especially retirement.

 

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The purpose of this disclosure is to explain how we make money without charging you for our content.

Our mission is to help people at any stage of life make smart financial decisions through research, reporting, reviews, recommendations, and tools.

Earning your trust is essential to our success, and we believe transparency is critical to creating that trust. To that end, you should know that many or all of the companies featured here are partners who advertise with us.

Our content is free because our partners pay us a referral fee if you click on links or call any of the phone numbers on our site. If you choose to interact with the content on our site, we will likely receive compensation. If you don't, we will not be compensated. Ultimately the choice is yours.

Opinions are our own and our editors and staff writers are instructed to maintain editorial integrity, but compensation along with in-depth research will determine where, how, and in what order they appear on the page.

To find out more about our editorial process and how we make money, click here.

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