Pay cuts: How to dealOctober 31, 2011: 9:54 AM ET
Taking a step down in pay is common enough that the right question is now how to take one well rather than whether to take one at all. Here are a few tips.
By Laura Vanderkam, contributor
FORTUNE -- Once, people assumed income was linear. You'd start out on the low side during your salad days, but then you'd see your income rise as you rose though the company ranks.
Whether that image was ever true or not, it's definitely not now -- particularly for people who generally do quite well. Research from economists Jonathan A. Parker and Annette Vissing-Jorgensen at Northwestern University found that, during recent recessions, households in the top 1% (those earning over $380,000 in 2008) experienced larger income shocks than any other group. Before the early 1980s, these well-to-do households had less income volatility than other people.
"What you earn today is much more lumpy than it used to be," says John Challenger, CEO of outplacement firm Challenger, Gray & Christmas.
As people switch individual jobs, or entire careers, more frequently, and as a lackluster economy has translated to some spending extra time out of the workforce, the idea of reporting a lower number on your tax return from one year to the next is no longer remotely weird or shameful. And as younger workers put a higher premium on work-life balance, some have even embraced earning less for a while as they pursue their dream jobs.
"Today, more and more people have done it, have had to do it, and have come to terms with it," says Challenger.
Indeed, taking a step down in pay is so common that the best question is no longer "when is it okay to take a salary cut?" It's "how can I structure my life so that a salary cut is possible if I need or want to take one?" There are a few ways:
1. Earn good money when you can.
San Antonio Spurs star Tony Parker recently made headlines by announcing he'd play for the French basketball team he partly owns during the NBA lock-out for $2,000 a month. One reason he could accept the equivalent of a $24,000 annual salary? He earned $2,000 per minute during his NBA games last year. If you have an option to earn overtime, pursue certain bonus payments, or take on a freelance project, or if your spouse is out of the workforce or working part-time but looking to scale up, go for it -- and then bank the extra cash.
2. Chuck your debts.
Jaime Tardy once earned six figures as a project manager for a video-on-demand company. "It sounded like it was a dream job," she says. "I'd get to travel around the U.S. with an expense account." But it turned out not be as rosy as she had envisioned. "I ended up having to work ridiculous hours and I gained a lot of weight from eating out a lot of the time."
Tardy was able to quit that job and start her own business coaching entrepreneurs (and blogging at eventualmillionaire.com) by paying off $70,000 in debt. She and her husband sold an expensive car, took on extra work, and budgeted like crazy until the debt was gone. When there's less interest piling up, less of your paycheck will be spoken for -- making it possible to shrink that paycheck if you want.
3. Buy less house (and car) than you can afford.
Books and TV shows on frugal living would have you believe that you can survive an income cut merely by cutting coupons and shopping in thrift stores. Don't believe them. According to the Bureau of Labor Statistics, the average family spends just under 13% of its budget on food and a little under 4% on clothing. If you cut both in half, you'd free up less than 8.5% of your budget. But the average family spends more than 50% of its budget on housing and transportation. Spend 25% instead, and you have 25% extra to play around with.
4. Stop thinking your salary says anything about you.
As popular career blogger Penelope Trunk advised her Brazen Careerist readers recently, "You are not worth less in the world because you are paid less in your job. Get your self-worth from a wide range of things and a pay cut won't matter to you." This is easier said than done, of course. For Jaime Tardy, giving up her role as her family's primary breadwinner, and the extra cash, was tough: "I'm still not 100% over it." But keeping one's income in perspective is still a good idea -- even if your salary goes up by 10% every year for the rest of your life.