Downshifting: Quit Dreaming and Start Planning

Why on earth would anyone want to take an intentional pay cut in this economy? It’s a question I get asked often when I share my “some day” goal of quitting my full time job to pursue more worthwhile activities. Fact is, the more pragmatic side of me agrees with their line of questioning.

The idea of stepping away from paid employment at a time where 10% (the real number is much higher, of course) of the population is unemployed, is fraught with risk. What if we blow through savings because of some emergency, and I can’t find another job? What if my side hustle crashes and burns and we no longer have any income. All legitimate concerns. However, there is another angle to this decision that is not often considered. Paid employment has considerable risk as well.

Trip Planning by AlphaTangoBravo / Adam Baker on Flickr

The Self-Employment Risk Myth

We tend to look at things in black and white:

Paid employment = 100% safety
Self employment = 100% risk

Real world experience tells us this is just simply not true. The truth lies somewhere in the middle. No job, industry or employer is 100% safe. And not all forms of self employment are as risky as others.

Personal situations differ as well. A two-income family with no kids is much more able to handle one spouse stepping away from the corporate world than a family of five living on one-income.

A family deep in debt with 22 years left on a huge mortgage would have a much harder time stepping off the corporate treadmill than a single person renting an apartment.

Seven Steps to Consider When Preparing to Downshift

#1  Cut recurring, monthly expenses. “The things you own end up owning you.” Tyler Durden was referring to all material possessions, but it could be said that the expenses we agree to each month wind up owning us. The Netflix subscription, Onstar, XM radio, lawn service, gym memberships, HD television service, and on and on conspire to eat away at our earnings. However, when we earn a regular paycheck, it seems easier to allow ourselves to be nickel and dimed by such services because we are relatively sure that next check will be there to pay for it.

When preparing to downshift, you must prepare your lifestyle well in advance. That means limiting things like dining out to once a month, vacationing to once a year (and done frugally), and similar niceties to infrequent “treats” rather than routine expenditures. After downshifting, chances are your income will be much lower, and perhaps much more infrequent, than you are accustomed to today. Eliminating these miscellaneous expenses now not only better prepares you for your new lifestyle, but it helps you succeed at Step #2.

#2  Get out of debt. Carrying debt while dreaming of downshifting is like loading a 150-pound pack when preparing to scale Mt. Everest. I suppose it is possible, but it will make your journey infinitely more difficult. The first step in preparing for freedom is to free yourself of the burden of monthly payments to banks, Sallie Mae, and the auto finance company.

If you are currently deep in debt, I’d encourage you to do a exercise that helped motivate me. Create a debt-free budget. Take a look at your most recent budget and simply remove all lines associated with credit cards, student loans and car payments. Now imagine this was your budget every month. Have a little more breathing room? Could you live on much less income without these payments?

#3  Pay off your mortgage early. I hesitated to include this one for fear it would be read as a prerequisite to downshifting. I know several people who have downshifted successfully with a mortgage. But this blog is about what I would do, so I’m including it in my list.

Before I can seriously consider stepping away from paid, full-time employment, I need to pay off my mortgage. With no credit cards, car loans or mortgage payment, our income requirements would be relatively small. We’d curtail our entertainment budget a bit, and save money in sinking funds throughout the year for large, annual expenses (property taxes, insurance premiums, etc.). With a low requirement for income, we would be free to pursue something we love, rather than be forced to pursue a big salary.

#4  Build a one-year cash reserve. Again, this is a personal requirement, but one I feel eliminates much of the risk of self-employment or downshifting to a smaller income. Once my basic expenses have been established, I would like for us to continue full time employment until we had one year of expenses saved – sort of a super emergency fund.

I would pay myself a “salary” covering our basic needs (and a couple small wants – remember, life is to be enjoyed) from this fund at the same interval I currently receive a paycheck. I would deposit earnings from my new passion into this account. On good months, the cash reserve balance would go up. On bad months, we would eat into savings a bit. But over the long term, this fund would smooth out the hills and valleys associated with infrequent income.

#5  Supplement your full-time income (for now) with a side hustle or two. Before stepping away from a full-time paycheck, it’s a good idea to get started on your second career. Beware of potential conflicts of interest if your new gig will be along the same lines as your current employment.

Three years ago I wanted to be a writer – I declared it my side hustle. Recognizing I probably wasn’t going to enter the world of writing as a first-time author and make mega bucks, I started small, writing for an article directory. I made about $3 per article. Because this had nothing to do with my full time job, I was able to moonlight in the evenings and early morning hours. After writing about 70 articles for someone else, I stumbled on a personal finance blog (TheSimpleDollar.com) and thought, hey, if I could figure out the technical stuff I could do that, too!

My idea was born, and for the last couple years I have continued to build my half-time job, writing at Frugal Dad as well as a couple small freelance opportunities, while maintaining my 8:00-5:00 full-time job. I’ll continue to do so until I’ve completed steps 1-4 above, and then decide if my earnings here are enough for us to live comfortably, debt free.

#6  Secure employee benefits as a non-employee. At this point in the process, you are ready to begin looking over your benefits plan at work and investigating the things you’ll need to continue when no longer employed. Here’s a sampling of the more important items:

  • Health insurance. Affordable health insurance for self-employed individuals is a challenge to find. But it isn’t impossible. Consider getting a free quote at online site like ehealthinsurance.com. Check with any organizations you are a member of – such as trade organizations, warehouse clubs, etc. Many of their business services include health insurance options.
  • Disability insurance. This is one you can’t afford to be without. Disability insurance provides income for you in the event you are unable to continue working. Most people are covered under their employer’s benefits package. You will no longer have that luxury, but should still cover yourself against the chance of disability.
  • Life insurance. If your only life insurance policy is through an employer, you should probably shop around for an additional policy anyway. If you know you are leaving that employer, it’s even more important. Many horror stories exist of someone being terminated from employment and suffering a heart attack two months later (when they were no longer eligible for employee life insurance).
  • Retirement savings. Fortunately, there are many self employed retirement plans out there. You’ll have to sift through the various types of plans to determine which one fits your goals and your business model. Depending on the route you take, you’ll likely find that you can contribute more to a self employed plan than you could as an employee (minus that sweet employer match you used to receive!).

#7  Step off the treadmill and enjoy. This may in fact be the hardest step. At this point in the planning process you are debt free; you’ve saved one year of cash reserves; you have cut back on your monthly expenses; and now you are ready to set off the treadmill.

Anyone who has ever done sprints on a real treadmill knows that the point where it is time to jump off is filled with anxiety. That belt is still moving pretty fast. What if one of my feet slips off the side of the treadmill? What if I land on the belt and my feet fly out from under me? It’s a real concern, and one that makes most people just stay on the treadmill a little longer, gradually decreasing the speed until it feels safer to step off.

If you’ve completed steps 1-7 above, you have effectively slowed that treadmill belt to a comfortable, walking pace. Stepping on and off the slow-moving belt is still a little tricky, but much less dangerous at 1.5mph than 10mph. A misstep here and you might stumble a bit, but you’ll survive.

Who knows what the future holds for any of us. All I know is that life is precious. We all have a finite amount of life energy to which we can devote to our passions. If you are not fulfilling that passion right now, I encourage you to begin planning to take the steps to make it happen. It will take sacrifice, but no greater than sacrificing your passion for a comfortable living and a steady paycheck.

Comments

  1. While I don’t have a job to quit as I’m still in college, I do tend to follow similar steps to get prepared to starting my own business.

    I keep my monthly expenses low, try to stay out of debt (except for the student’s loan), and generally try to live frugally and keep the right mindset so I’m ready when the time comes.

    • Even though you are still in college, you are definitely on the right track by living frugally now, rather than being forced to later. You will leave school with a world of opportunities in front of you, rather than being forced into trading what you really want to do for a big paycheck to pay for the trappings of a normal post-graduate life (big house, big car, fancy clothes, etc.).

  2. Thanks for such a well thought-out post – this exact subject is something my DH & I have been mulling over for months now and after getting our giant tax bill, we’re talking about it even more seriously! I just have to figure out what my “side hustle” will be… We’re almost out of debt except for the house ($114K paid off over the past 39 months), should be done with Baby Step 2 by this time next year (about $25K left to go). That’s when we’ll get really serious about me working from home.

  3. Excellent post. I’ve been planning for a downshift for years, and your post raised some items I hadn’t thought of. Thank you!

  4. Your post brings up points that are good for everyone! In my opinion, you hit the nail on the head when you said that ‘corporate’ employment has risk too. Even if you are employed, you are at risk for a pay cut. It isn’t like you can work for an automotive company for 40 years and have a wonderful pension anymore. Most companies I see are not loyal to the employees, and I think some employers are taking advantage of the economy because they know that people don’t have anywhere else to go. Regardless, I think everyone should stash as much money away as possible in the event they may be forced to downshift.

    I wish you luck on your quest as I really enjoy your writing!

  5. I like my job, but not enough to work full time. If and when my boss ever lets me work part time so that I can pursue other things with my free time, I would be all over it. Until then, I paying down my mortgage as fast as I can in order to down shift sooner than 50.

    • Asithi: Have you ever read The 4-Hour Workweek by Tim Ferriss? Sounds like your philosophy lines up pretty well with his. I particularly enjoyed his thoughts on slowly exiting the workplace through a series of requests to work less in the office.

  6. What a great article – I like the picture of your office. :)

    A couple of things:

    1) Self-doubt – it’s easy (and smart) for people who are successful with “side hustles” to be doubtful about the odds for long-term success. At some point though you have to look at what you do, how much money you make and how long you’ve been doing it and conclude that maybe it isn’t a fluke and maybe you are actually good at it? (I’m not there yet myself).

    2) This is probably obvious but if someone can build up a side hustle to a decent income working part-time. Is it not logical to assume that by working full time you can increase the rate of growth?

    If you work 10 hours a week on the business and get the income up to 50% of your regular job. I would think that working 40 hours/week should mean that you can get it up to your regular wage or more. Yes, it will take a while but I think it can be done.

    This of course ties in with #1, if you have a hard time believing your current success is not a fluke then it’s hard to believe you can grow the business significantly.

    • I’ve often wondered if I gave writing a full-time effort if I could bring my earnings up to my current full-time income. Of course, I’m trying to take the approach that I don’t really need to make the same full-time earnings since I’m credit card debt free now.

      However, I still have a mortgage, college and retirement savings needs, healthcare costs if I went out on my own, etc, that would require a modest amount of earnings to cover.

  7. Jean, it’s this freedom that I crave. I want to be free to create more here at Frugal Dad. I want to enjoy more time with my kids in their younger years. I want to put more life energy into things I consider more worthwhile than paper-pushing.

  8. I like that idea of a Super Emergency Fund!

    That is something that I’ve never thought of before. While I’m not exactly going to downshift, I would like to pursue other opportunities of employement (self-employment and consulting), preferrable at the same rate of pay or better :) … Following a plan like yours could be applied in the same way though!

    I loved the analogy of the treadmill and downsizing your employed job!!!

    Sounds like an awesome plan!!!

  9. Eh, Jason, I think you’re playing it too safe here. You know how to live frugally. That’s definitely helpful, and something I still do today. But paying off your mortgage first? Setting up all these huge goals to achieve before you pursue your dreams?

    Do you really believe you can make more money being self-employed than at your job? I don’t think you do, yet SO MANY PF bloggers are making 6-figure incomes. Look at Ramit, for instance. He’s got a high 5-figure annual recurring income from Scrooge Strategy, plus he did $127,000 in one day launching Earn1K.

    I don’t have nearly as much traffic as Ramit, but I recently made $4,000 by doing one 90-minute webinar.

    With the ability to make $4,000 in a day, I’m pretty confident I can grow this to a 6-figure business fast. And you have all the skills I have. The only thing I see missing is the confidence that you can do it.

    -Erica

    • Erica, I am naturally more conservative because I have three mouths to feed at home. I have found the more people you have depending on you for their livelihood, the more cautious you tend to be.

      Not saying you don’t make a good point, but my situation is probably different from yours and Ramit’s.

      • Jason,
        I totally agree with you. The more “responsibilities” you have, the harder it is to take that big step.
        My plan is similar to yours, although not necessarily with writing at Dividend Money. I need to be conservative.
        I’m at the point where I have no debt other than the mortgage, and I could pay the mortgage off by liquidating my other accounts. However, I wouldn’t have my Super Emergency Fund then and I’d also be a fool since I am paying 1.75% interest on my mortgage right now.

      • Okay…would you like me to cite examples of successful bloggers and online biz owners who have kids, then? There are plenty. Adam Baker is doing well with his new ebook. Steve Pavlina has two kids and just went through a divorce, but is still making $50,000/month or more. Even someone like Amy Bass (you probably don’t know her; her website is mydebtfreegoal.com) went full-tilt online. Amy is a real inspiration, by the way; she used her online business to pay off $73,000 of debt. I have twenty more success stories where that came from.

        I get what you’re saying–I do. But I also think you’re using it as a crutch. There is nothing stopping you except you and your beliefs. There is no reason you can’t turn this blog–which is popular–into a 6-figure+ online business within 6-12 months.

        I’m here to help if you need it. I really want to see you grab the bull by the horns and succeed. The world needs more fiscally conservative, smart, great writer millionaires!

        -Erica

        • Erica, for each of those success stories there are probably quite a few people who didn’t “make it”. Either they failed miserably or more likely just didn’t make enough money to keep doing it full time.

          I agree with you that Frugal Dad is a great candidate to be very successful but regardless, there is some risk involved.

          • “Erica, for each of those success stories there are probably quite a few people who didn’t “make it”.”

            Yep, and having heard many of their stories, I know why most people don’t make it. They simply don’t want to put in the effort! They want to pull a lever and hear BING BING BING and cash comes out at them. Well, that is called gambling, not building a business.

            Jason has proven he has what it takes. He’s dedicated, persistent, and frugal. That’s a huge reason I’m pushing him to go for it. There is no reason he can’t be making 6 figures in 6-12 months. NO reason. And no reason he can’t eventually grow a multi-million-dollar online business. The only thing that will stop him is fear. And I’m here to help with that, as are others. :)

            -Erica

        • I know each of the individuals you mentioned – and I was an early fan of Amy Bass and her ambitions to become debt free. You know what each of those examples have in common? A spouse who works outside of the home (well, except for Steve). Yes, I admit I’m using the fact that I am the sole breadwinner as an excuse not to move to full time. But that does make it a little more difficult – no spouse benefits available, no guaranteed income there, etc. Maybe it is just a mental block.

          I was raised to be conservative – go to school, get a job, keep that job, etc. So breaking from that tradition is difficult for me. One thing that sticks in my head is something my mom told me before she passed away last year. She was proud of my early success with writing and said for me to, “Go for it! Don’t live life afraid of taking a chance.” I don’t think Mom lived with many regrets, but I know she had similar entrepreneurial dreams left unfulfilled.

          LIke I said, her words have stuck with me for the last year, and fuel me to keep up the website and my full-time job (which alone often requires 40-50 hours of my time each week).

          I appreciate you cheering me on – my mom would agree with you!

          • Frugal Dad..You are an inspiration. I’d like to add that the fact that your working a day job actually may help your readers relate to your posts more. I find that my views are starting to fall out of line with many of the “professional” pf bloggers stories of late…so a very selfish part of me wants you to continue working.

            I do value having the extra income to pay down our mortgage and save for kid’s education and retirement. Right now, I value that more than my personal freedom for that extra 40 hours/week. I just work to make as much out of the time I do have and search out jobs with as much flexibility as possible.

  10. A few other factors to consider when thinking about shifting from being an employee of someone else to being self-employed:

    * What is your real motivation? Is this about pursuing a passion, the inability to get work elsewhere or a way to work from home? YOu need to be very clear on this and understand how it can/will affect the outcome of your effort.

    * Your age –and how that may affect what you are trying to do AND how it may affect your re-entry back into the employee category if you cannot sustain yourself down the road with self-employment

    * Your health. Unless you’re covered by someone else’s insurance (lucky you), you need to set aside significant chunks of money for health insurance. Unfortunately, one of the first things many people who become self-employed (by choice or being forced to) is to cut this from the budget. You may be very young, very healthy and think: I’ll never need it. But the reality is, anyone can have an accident or become ill.

    * Your family status (single, responsible for the support of others, etc.)
    The decision, which involves a lot more than the key financial aspects, affects everyone in your life in numerous ways that may not be clear until after you’ve made the choice–without thinking about the reprecussions and changes needed in the family setup.

    * How much will you sacrifice and at what “cost” (not just monetary) to succeed? Are you prepared to work virtually 24/7 if needed? To do the marketing and sales needed to get and keep new clients?

    * What is the criteria for the “success” of this endeavor and what is the timeline? What if your objectives (financial and otherwise) are not met in say 1, 2 or 3 years? Do you dip into savings or what?

    And, finally, though you think it may be negative,
    * What is your exit strategy?

    When is it time to pull the plug and be honest about your ability to generate sufficient income (on a regular and consistent basis) from self-employment?

    You can go thru periods of great success with self-employment, but as anyone who has ever done it in any field can tell you, there are lots of dry spells and unless you create other revenue streams or find new clients, it can be very tough. Because what you learn is that while you can save up a lot while hauling in revenue, in the dry periods, you can spend thru those “savings.” It can be feast or famine and that cycle is very tough on people.

    If there is any way that you can do what you love “on the side,” do it first and test the waters. And if you say you don’t have time or energy, well, that already tells you something about your “passion.” (Ask the folks who have written novels in the wee hours of the morning or night before or after a full-time job. It can be done. IF…it’s something that matters.)

    Finally, you really need to assess whether your ability to live with uncertainty. Cause that is a huge part of self-employment, even in seemingly stable endeavors.

    If you’ve always got a plan b and always have more energy for what matters to you, and you can hustle, you’ll probably succeed, one way or another.

  11. Excellent write up, Jason. I like your approach. One expense you mention that I don’t have covered yet is some kind of disability insurance. I had a bit of that with my former employer and should probably look into that. Thanks for the reminder.

    As productive as you are in full time employment, I can’t imagine how much you’ll do once you do go full time. Good luck and thanks again for the list of steps.

  12. Very comprehensive post (enough info for maybe three blog posts, actually…). I struggle with the job security vs. freedom balance all the time. I loved when I was only working part-time and had so much freedom and flexibility in my schedule. But it was tough just scraping by income-wise. One of these days I’ll figure out how to have my cake and eat it, too ;) –and this post is an excellent road map for how to realistically achieve that!

    • @Stella, I started to break this post up into a series, but I was on a roll and had a point to make! I’ll probably just take tomorrow off and let this one simmer a bit. It was a lot to digest!

  13. As someone who shares the dream of some day going full time in the blogging world, I can understand your hesitation. It’s natural, especially when you have all those mouths to feed. We’re currently expecting our first child, and it does make me think twice about jumping into it without first planning everything out.

    I’d love to go full time, but as things currently there are a few things stopping me:

    1. Income: I would like my blog income to meet or exceed the income from my day job before I quit and go full time. Currently I do pretty well, but it hasn’t risen to that level quite yet. We could get by with my blog income, but I’m not sure we’d have much left over. It’s nice to have 2 full time incomes as I do now.
    2. Insurance: My family has the issue of insurance being very expensive because of some pre-existing conditions that my wife has. Because of that we can only get affordable coverage currently through group coverage – like the coverage at my place of employment. This is probably the biggest issue for me preventing me from going full time currently.
    3. Standard of living: Since I’ve been doing relatively well with my blog income, we’ve began adjusting to a new standard of living. We’ve gone from having just a little bit of money left over every month – to this past year where we made 6 figures for the first time. If I were to quit my day job, that would definitely cut our lifestyle – which probably wouldn’t be a bad thing since we’ve fallen prey to lifestyle inflation just a bit. If we do end up going down that road we’ll have to take your advice and cut the lifestyle well in advance.

    In any event, if anyone can go the self employed route and succeed, it’s you Jason. I’ve watched your site grow over the past few years, and it’s inspiring for someone like me who aspires to do the same. Good luck and we’re all pulling for you!

  14. Great analysis! We have been considering a similar leap. Most people think we’re crazy to give up a salary in favour of an uncertain income. The fact is though, I’m just as nervous about my husband’s current “stable” job as I am about taking a new job where the income is dependent on sales.

  15. SarahA brought up quite a few excellent points. The other point that I would like to point out is that it is Jason’s life and his dream. Only he can walk in his shoes.

    Erica, I can appreciate that you are trying to help by pushing Jason to take the jump. However, the decision he makes will affect not only him but his family and children. Part of living your dream is also living it stress free and with confidence. Rushing to follow someone else’s agenda is not going to give him that.

    I happen to think that Jason is being prudent in his planning. Life throws a lot of curve balls that can knock you out in a second. My family and I have had to give up everything we own three times in my life despite all our savings and precautions. All it takes is one second to get a diagnosis and how do you value a life against money or assets?

    Last year, despite having health insurance, two doctors issued the requirement that we have to pay $165,000 up front for my husband’s treatment. If we had waited even one month, I would be planning his funeral this year.

    It’s the unexpected or unplanned that can destroy financial security.

  16. Debt and building my emergency fund are the only thing holding me back from working for myself. But I feel the stars aligned and speed picking up. So, I’m very concious of my spending decisions and am throwing $ in the bank. I’m ready. Bring it on!

  17. We’re trying to get all these steps handled simply for early retirement. We might have side hustles and we might not, but we definitely know that we need to cut expenses, get debt free, and find benefits before we can permanently retire.

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