How can I measure the net effect of a drastic cut in gross income?

May 11, 2011 5:04 AM

How can I measure the net effect of a drastic cut in gross income?

I'm seriously considering taking a job in my field that would result in a 40% pay cut. The upsides are: a less expensive cost of living (though nowhere near 40% less!), substantial increase in career satisfaction and skill development, and a better work-life balance. I want to take the job but the salary drop is giving me the willies. I'm running a nice surplus now, including having saved up for a down payment on a house, but this would be gone once I took the new job. More generally, I'd like to have a broader understanding of the impact of my decision on net income and the ability to both save for retirement and replenish the cash reserve that will be spent on the down payment. This would include an analysis of tax savings realized from home ownership as well as the difference in pretax withholding for things like health insurance and commuting expenses. Is there a website or a program where I can plug in all of the different variables - not just a mortgage calculator or a W-4 calculator but something that can give me an full "old life vs. new life" understanding? I'd like to be able to feel better by rationalizing to myself that the gross income cut of 40% translates into something less severe after accounting for these variables.

posted by moammargaret to work & money (8 answers total)

Why can't you just do this in a spreadsheet? You might need a web calculator to figure out your net pay after taxes, but every other number in the calculation is a number you already know.
posted by COD at 5:16 AM on May 11, 2011

1- Look for the little things that might make the lower cost of living seem more manageable. IE, shorter commute so there's more time to cook at home, or no more $10 lunches every day, having a washing machine means not having to send laundry out, having a garage means not having to rent a storage space, and so on.

2- Realize that some of the salary cut is literally the price you are paying for a more fulfilling job.

3- Figure out what the benefits are. Does the new job include insurance where the old one didn't? What are the prospects for increasing your pay after a couple of years?

4- I agree, just make a spreadsheet. I've found that doing that work helps me understand the problem better than just plugging numbers into a calculator. To figure the taxes, look in the 1040 instructions to find the brackets, and make an if statement to calculate them. In excel, the formula I used is this (double check the numbers, I don't know what year this is for):

=IF((B4>372950),(108216+0.35*(B4-372950)),(IF((B4>171550),(41754+0.33*(B4-171550)),(IF((B4>82250),(16750+0.28*(B4-82250)),(IF((B4>33950),(4675+0.25*(B4-33950)),(IF((B4>8350),(835+0.15*(B4-8350)),(B4*0.1))))))))))

"B4" being the gross. The info might be in the "tax withholding information for employers" publication. To calculate it monthly, that pub shows the correct numbers for each kind of pay period. But basically, if you are doing it monthly, you divide the dollar amounts by 12.
posted by gjc at 5:45 AM on May 11, 2011

Budget. What are your fixed costs? Car loan, student debt, etc. What are your variable costs, gas for commuting, etc.

I've changed jobs several times, and had significant pay cuts, and have generally made it back later in promotions. If it's a cut from really great pay to pretty decent pay, it's manageable. If it's a cut from pretty decent pay to just barely adequate to cover expenses, that's pretty difficult.
posted by theora55 at 6:33 AM on May 11, 2011

It goes from great to decent. Mortgage plus property tax would be about 25% of gross.
posted by moammargaret at 7:27 AM on May 11, 2011

Does the new job also free up some time that you could use for an additional income stream once you get settled?

That could be something really simple - one or two nights a week at a local store could add up to enough to help you feel comfortable, or maybe you'd have time/energy for a side business that complements your profession.
posted by modernhypatia at 7:54 AM on May 11, 2011

Just to throw it out there.

A less expensive cost of living has a long term cost as well. Unless you plan to stay there, you need to consider that the lower income and lower cost of living still amount to low absolute savings in the long term. Also, low cost of living often means a lower prestigious location, and while it is unfair it is reality that there is bias against Podunk when trying to move upscale again. If these are not your plans, ignore all of this. Career satisfaction and skillbuilding are not tied to geography, though I suppose work/life balance is.

Depending on where you are in your career, usually the correct answer is "take the job that pays the most money." Yes, this does lead to a bad skew in work-life balance, but that eventually amends itself. The reality is that companies, like people, value more highly the things they must pay dearly for even if doing so is irrational.

But I'm an old man now, and while this has served me well in the first 2/3rds of my career, I do understand that there's a time when you want to slow down and enjoy life. If you're there, go enjoy, but I suspect you would not be asking this question.
posted by rr at 9:30 AM on May 11, 2011

In the short term, you do this the same way you do it when taking any job: with a spreadsheet and a lot of research. Complicate as much as you like with income taxes, social security withholdings, property taxes, commuting costs (car insurance, gas, mileage), etc. This is pretty easy if you have a comprehensive budget tool, tax formulas, and the internet.

In the longer term, there's a lot of hard to quantify stuff in your question. There's the intangibles like happiness and satisfaction. But there's also risks. You could lose your job, and in a larger city there's a greater chance some other employer nearby is looking for your skillset. You're also more limited in your career when it comes to raises and promotions if you work for the only game in town. I have no idea how to measure such things, and they really have no meaning to you outside their dollar value.
posted by pwnguin at 3:35 PM on May 11, 2011

Oh, and don't forget to calculate some of the effects of moving to a smaller town: fewer stores, fewer government services. When I lived in KC (joco really) the public libraries were fantastic and well stocked. I now live in a smaller town and the library is dramatically less well stocked, for example. So maybe budget a bit more for netflix / amazon prime.
posted by pwnguin at 3:37 PM on May 11, 2011