Should You Ever Take a Pay Cut? Here's How to Decide

All logic tells you that, when taking on a new job, you should be moving "upwards."

There’s rent to pay, there's inflation (so much inflation), and you’ve finally reached a point where you can afford to go out to a nice dinner without flinching at the check. 

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However, salary is just one factor to consider when evaluating a job offer. Some of the other factors include the actual job and what you'll be doing, who you'll be working with and other leadership at the company, and your potential for growth—both in job title and longer-term salary trajectory. Have you thought about your long-term and short-term career goals?

So, is it ever a smart move to take a pay cut? The trick is making the call.

What Is a Pay Cut?

In the most simple terms, it means you are accepting a lower salary or hourly rate than in your current job. This can be seen as a financial risk due to a job change. In exchange for lower pay, you are often getting something else that is equally as—or more important—to you.

For example, people looking to make a career transition—let's say from accounting to digital marketing—might need to consider lower compensation in exchange for learning new skills and transitioning their careers.

It's important to remember that pay cuts can include more than your salary. It can also impact your bonuses and benefits—like that 401(k) your current employer is matching, the contribution to health insurance benefits, and any other additional benefits that have a cost associated with them.

Common Reasons for Pay Cuts

Circumstances Why You Might Take a Pay Cut  

Here are a few reasons why you should take a financial step that you might perceive to be "backward."

You're Not Juggling Too Many (Inflexible) Responsibilities 

Sit down and consider: What are your life commitments and related expenses? Are you married and covering at least 50 percent of your household expenses? Do you have children (or are you talking about having them in the next year or two)? Is your current salary just enough to cover rent, student loans, car bills?

If you’ve got wiggle room—meaning you’re free to order take out regularly, buy yourself a nice new sweater whenever you please, or you’re setting aside more savings than your target goal—and no one else is relying on you or affected by the potential corners you’ll have to cut, you’re probably primed to take a reduced salary for a job you really love.

If things are tight, but you feel confident that you can sit down with your significant other (or family) and find ways to cut back so that you can make the move, it’s worth considering. Start by gauging your flexibility, then decide if you can really make it work.

Your Current Position and Salary Have Plateaued

Even if your salary and perks are great, does it feel like you’ve climbed as high as you can at your current company? Maybe your manager has even told you that regular raises and more purposeful work is just not available. Then it's time to ask yourself honestly: Are you at a dead-end, or are you too burnt out to wait long enough for things to change? If so, moving to a more dynamic, albeit lower-paying, company with growth potential is totally worth it. 

You're Switching Industries

Were you convinced you wanted to work in finance, but a few years of dogged work and tense office politics have proven that maybe you jumped the gun? Are you aching for the days when you worked on your college newspaper?

If you want to make a career transition, you’ll have to take a few risks—and probably a pay cut—to get that fresh start. (P.S. We have an entire online course, The Career Transition Road Map, that will teach how to make a seamless career transition, too!)

You Want to Pursue an Advance Degree

Do you know you want to pursue an advanced degree like an MBA, but your current company doesn't offer tuition reimbursement?

Look into the cost of advanced degrees, and you'll see why some people are happy to take a lower salary in exchange for tuition reimbursement. However, before you jump into collecting other degrees, consider how that education will support your future growth (both professionally and financially) offer you better long-term career prospects.

Your Personal Life Is Taking a Hit

If you’re working 90-hour weeks, rarely seeing your friends, catching colds 15 times a month, missing out on important life events, fighting with your boyfriend, and developing ulcers—you’re probably suffering more than your salary's worth.

Let’s say that pay reduction means shorter or flexible workdays, additional vacation time, the chance to work from home, and just a better work-life balance. Truth: Benefits count as much as dollars. It’s definitely worth considering because you can't put a price on your mental health and quality of life.

The Title Change and Responsibilities are Just That Great

If you’ve been treading water as "Associate III" at a giant corporation, and suddenly you can take a job as Director of Marketing at an exciting startup, consider it.

Even if the role pays less or is potentially unstable, the chance to learn (and have those experiences on your resume) could net you a higher salary. 

You Want Less Responsibility

This is the complete opposite of the previous reason. Perhaps you've been the manager for a long time and this next role allows you to be an independent contractor (i.e., no management of people), but it requires a lower salary. Depending on where you are in your life and your career, that tradeoff might totally be worth it. 

You Want to Pursue Entrepreneurship

Maybe you've been building and growing your side hustle and working a full-time job, but you're getting to that tipping point—the place where your side hustle is almost breakeven with your current salary. Not to mention your job satisfaction continues to decrease as your business grows.

Even if you're not 100% breakeven, maybe you're getting close, and the risk of being a full-time freelancer and being fully responsible for covering your finances outweighs it all. If you see a bigger potential upside with your business vs. your current job, it might be worth it. Just remember taxes and benefits.

You Want Something Else—Or Something More Than Salary

If you've been re-assessing what you want most from your career and you're in a place where a certain salary is not on your "must-have" list, then you might consider taking a pay cut to be part of something you want more. Maybe you're dying to work for a specific company. Or you want to work somewhere where you make your own schedule with a remote location, which allows you to move somewhere with a lower cost of living.

Alternatively, maybe you're willing to take a lower salary in exchange for equity or other types of total compensation. Equity can pay off a lot more in the long run if the company performs well.

Another common reason for taking a pay cut is to get better health insurance or work somewhere where they cover most of your healthcare costs. Maybe you've recently been diagnosed with health issues or your immune system is just not your friend. Maybe a larger company with great benefits is what you need more than a pay raise right now.

You "Hate" Your Job (or Boss, or Coworkers, or Commute) 

If an element of your current job is leading to workplace burnout and bleeding into other areas of your job, it might be time to go a different direction—and take the pay cut that could potentially come with it. We don't talk about how much happiness is worth nearly enough. Happiness affects your health, your relationships, and the quality of your work. 

If you "hate" something about your job—whether you hate your boss, the mundanity of your job, or your insane commute, it's time to make a move to fix things.

Money isn't everything. 

How to Prepare Yourself for a Pay Cut

Before seriously considering a pay cut, dive deep into your finances and know what's what. Understand your debt, your fixed and variable expenses, and consider your future. Do you want to buy a house? Are your school loans about to be paid off? Do you have money in savings? You want to make sure your pay cut is feasible in your life.

Another great way to prepare for your pay cut is to create a new budget with the new salary. Can you make it all work? And if you're making a major shift you might want to consider getting advice from a financial advisor or financial planner.