7 Things To Consider Before Taking a Lower-Paying Job, According to Ramit Sethi
Written by
Jordan Rosenfeld
Edited by
Molly Sullivan
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
While it’s rare to find a person who actually wants to make less money, there may be times in your life and career when you need to make a job change that comes with a lower salary than you’re currently making.
Such a change may be a necessary part of a career pivot, or even a result of a geographical move.
Finance expert Ramit Sethi covered this issue in his newsletter, so before you take a lower-paying job, you want to take some things into consideration.
Age Matters
The viability of taking a lower-paying job depends on a lot of things, but one big factor is your age. A 25-year-old software developer named Alek, making $80,000 per year, wrote to Sethi:
“I am considering switching careers to a new field, which would start my salary back at an estimated $65k due to little experience. How can I be prepared for this drop, or any period in between? Should I stick it out here as long as I can beforehand?”
Sethi commended Alex for thinking ahead, writing, “The earlier you are in your career, the bigger, bolder changes you can make.”
Consider How Much Time You Have To Build Your Career
Because Alek is young, Sethi said he’s got time to make big changes, and it will most likely turn out fine.
“However, as you become 40, then 50, that window gets much smaller,” Sethi said.
He pointed out that the same person changing industries at age 48 could experience “devastating consequences” with a pay cut of as much as 20%.
“The reason for that is that most people don’t save and invest early in their careers, and they inflate their expenses, so they don’t have a lot of wiggle room,” Sethi wrote. “You basically lock yourself into needing to work to pay for things that you bought years ago.”
Prioritize Your Debts
Alek does have debts, which he said inflate his fixed costs, but he directs extra funds toward the higher-interest loans. Sethi suggested he’s actually overpaying on his debts by $500, but ultimately suggested this is not a bad thing. If you have debts you’re struggling to pay, or a shorter timeline to pay them down, taking a lower-paying job might not be feasible.
Consider Your Retirement Accounts and Other Investments
Investing in your retirement is important for all ages. However, if you’re younger, Sethi suggested, “You want to be investing aggressively. You build the habit, and that money tends to compound over time.” He commended Alek for investing 13% of his income, which he said “is very good at a young age.”
Alek puts 10% of his income toward his 401(k) plan, which are pretax dollars, and receives a 6% employer match. He’s already got $26,372 in his 401(k) and another $13,907 in a Roth IRA, for a total of $40,279. Sethi called these investments “very impressive” and said it “shows a demonstrated ability to invest.”
Be Sure To Have a Solid Emergency Fund
Emergency funds come in handy, especially at transitional times such as changing jobs. The bigger that buffer, the better. For someone in Alek’s position, who has $52,000 in savings already, a very high amount for such a young person, he may be able to weather a pay cut.
Sethi wrote, “I know you’re not just saving for an emergency fund, but if you want to make a career change and you’re passionate about it, guess what? You’ve earned the financial ability to do that.”
Limit Your Fixed Costs
Fixed costs are those that are pretty non-negotiable, such as your rent, food, utilities and similar. Sethi suggested keeping those as close to 60% of your income as possible. While Alek’s are at 69%, given how well he’s doing with saving and investing, Sethi suggested he’s in a good spot.
Play the Numbers Out
Most importantly, before you take a pay cut, you must run the numbers yourself to see if the new lower salary will be sustainable. It depends on all of these factors, not just income and expenses. Sethi advised running a number of scenarios such as:
“What if you lose your job? What if you buy a car or a house? What if you take a trip this year instead of next year?”
Anytime you plan to make a major job change, run the numbers, look for ways to cut or save money and consider getting a professional’s advice before you take a risk you can’t come back from.
More From GOBankingRates
