Can you maintain your spending with a pay cut?

Can you maintain your spending with a pay cut?

I come across my old friend, or to be precise, my old colleague and we used to work together some five year back, i.e, around the start of 2020. He switched the job when corona was receding i.e around mid of 2021,and everyone was investing in digitization and being in IT field, and by grabbing the right opportunity at the right time, he landed a 4x of his current in-hand salary. Fast forward 3 years, he has started getting some major issues in his job that is creating condition for him to quit the job. I will not go in the condition and nor it is my intention of this post. Anyway he started looking for the job so that he can quit.

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Now, when he started looking for the job, 2 factors come into play.

1. When he got 4x increment in the salary, job market conditions on that field was very good, and 4x increment put him in the top salary bracket available at that role.
2. After he got hired, market went into the salary correction and many employee get fired, Digitization boom that started with Corona is almost complete, so salary range is now reduced.

So in the current market condition, any outside offer is causing almost 30% of salary cut and when I asked why he not consider to take a pay cut for mental peace for time being and start afresh for new job while escaping the current environment that is becoming toxic for him?

He replied to me that taking 30% pay cut is not possible as his monthly expenditure cannot be met. This kept me wondering because with 30% pay cut , he will be still earning 2.5x more what he used to earn 3.5 year back. It simply mean that in the span of 3.5 years, his expenditure raised by more than 2.5x times.

I did not dig down much on his expenditure but I figured out that once he started earning more, he rented house on expensive location, he purchased car and paying it's EMI and now doing too frequent air travels from his workplace city to his home city. Since it's is expensive society, so the cost of services has also increased. He is now not ready to to go back to his previous life style or degrade the current life style based on pay check cut. All of this changed in less than 4 years.

My intention is again not to question his choices and decision but it made me wonder how most of us start increasing our expenditures when we get decent money.

4x salary increase instead making him achieve "FIRE" (Financially Independent, Retire Early) goals early, caused him to get his "FIRE" goals further back, if we wanted to maintain the new life style.

In my opinion, if he had not increased his expenditure so much, then getting 4x money for the next 4 years will at least help him to achieve his FIRE goal atleast 5 years earlier.

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With his example, I got few things clear in my mind as listed below:

1. Earning more will not help in your retirement goal if you are not investing more towards your FIRE goals.
2. There can be uncertainty in life, so do not rely on a single source of income.
3. Keep some emergency fund that can keep you afloat at least for six to twelve months. This money should be separate from your retirement goals.
4. Be ready for worse and do not become so rigid in your lifestyle that cannot be degraded at all.
5. Do not put yourself in a high EMI/rent burden because you are earning more now.

My 2 cents.

I guess everyone deserve the fruit of it's labour and can enjoy life but do not become so habitual of things that you cannot imagine your life if these things are taken out from your life. Also one should not compromise on the retirement goals and try to become financially free as soon as possible, though it requires doing more savings and investment, as less money will be available for basic needs and luxury.

Posted Using INLEO