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.
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.