Taking a giant pay cut - what steps to take?

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notmyhand
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Taking a giant pay cut - what steps to take?

Post by notmyhand » Mon Feb 02, 2015 9:19 pm

My husband and I are independent contractors in the oil and gas industry. Despite the little pop in oil prices over the weekend, we received word today that our largest client will be substantially cutting their budget and we can either bill lower or lose them. The cut equates to about a third of our pay but other rumblings make me feel like we will lose at least half of our pay by the end of the week. I have reached out to other potential clients but with the entire field hurting, I doubt we can pick up any more work and probably need to work even harder to keep what we have. My heart has been racing all day as I have not experienced a downturn in my career as of yet (I am 25). I am turning to this forum for words of wisdom as I am unsure whether our game plan is right for the situation.

We have eight months worth of emergency fund in savings/CDs.
We are currently maxing our solo 401ks, HSAs, and Roth IRAs.
Up until this point we have saved between 50-60% over the past year and a half.
We are in the middle of a bathroom addition (8k).
We are currently paying 3x our monthly mortgage in order to pay off our home within 5 years (ironically this sprint to the finish line was due to the fact that I was afraid of a downturn in the field!)

We sat down this evening and reduced our budget. Unfortunately we have outstanding obligations for the next two months that we cannot back out on (already paid 5k on the bathroom, need a root canal, need to pay for medical procedures that occurred last month but we have yet to receive a bill for). Here is the budget we came up with that does not account for the above:

$900 mortgage
$200 electricity (no natural gas in the area, this varies from $140-$200 monthly, might be lower as we put in a new water heater, keep the house at 55 degrees in winter)
$55 sewer (same amount no matter usage)
$40 internet (already call Comcast to threaten to leave once a year and they switch our plan from $60 to this plan)
$400 groceries (this we can probably work on further, this is a big reduction from our going-out for lunch daily budget)
$60 pets (two dogs, four cats, and two aquariums)
$230 cell phone (this we need to change, four phones on Verizon, two for the husband's parents, afraid of changing due to being in rural areas often but will look into asap)
$90 cable (if needed, has anyone had experience in cancelling this? we are in the middle of a two year contract)
$7 Netflix
$20 household supplies
$213 his health insurance (HDHP plan)
$205 her health insurance (HDHP plan)

There are no car expenses as we bill our clients for mileage so usually we come out even. We can usually stop at a grocery store along the way. What else should we look into cutting? This budget also does not include irregular expenses such as house insurance, property taxes, disability insurance, life insurance, or car insurance, although the next time one of those is due is in the summer and I hope we are back to full swing by then (although that's the optimism talking). We are interviewing a possible roommate for our spare bedroom tomorrow (although this will only bring in ~$300 monthly) and I am taking more clients for my side business (~200 a month).

I would love to keep saving but is that foolish until our income returns? Or is it best to assume our income will stay at this lower level and keep saving and just cut expenses as much as possible. I'm afraid we will run out of cash if this keeps up for months and months, although we should be able to live on our income and continue most of our savings. Would the first saving step to cut be the extra mortgage payments? We will max out our HSAs first as I have enough health receipts to warrant taking all of the money out of them in case we need it.

At this point in time, our client keeps promising they will keep sending us work as they love us, they just can't afford to pay us as much. They are getting rid of a large amount of our co-workers so I believe they are being sincere in keeping as working for as long as possible. However, I am not delusional so I know that complete lack of work can and will happen if this keeps up for much longer. Thus, should would be hoarding cash instead of putting it into retirement accounts?

Anything I am missing? What would you do if you faced your income being reduced by half or more? We are thoroughly scared. We have always lived below our means and we knew picking this industry meant this would happen at some point, we were just not psychologically prepared.

niceguy7376
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Re: Taking a giant pay cut - what steps to take?

Post by niceguy7376 » Mon Feb 02, 2015 9:30 pm

Will the 50% cut in income meet your expenses or forces you to use EF?
It might be easier to understand if you inform that you are going down from 500k to 250k or 200k to 100k.

Quickfoot
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Re: Taking a giant pay cut - what steps to take?

Post by Quickfoot » Mon Feb 02, 2015 9:35 pm

I'd say bathroom remodel is on hold. If the bathroom isn't functional and you only have one then spend the least you have to for it to be functional.

Given that it's very possible oil prices will remain low for years and the cost cutting in the industry hasn't even really kicked in yet I would stop paying extra on the mortgage and beef up the emergency fund as much as you can. If things stabilize you can always make a large one time payment on the mortgage. Keep in mind contractor reductions are not layoffs, they are cost cutting so contractors are a great way for employers to reduce headcount without getting killed in the press for cutting jobs (I was a contractor for years).

Your expenses (other than the cell phones) are reasonable. Switching to T-mobile or sprint would cut your cell phone plan in half and there are many other options available. Since you are in a contract on TV rather than canceling see if they will allow you to suspend your service (directv and dish will let you do this, many cable companies will as well) and if they wont then downgrade to the lowest plan that meets your contractual needs.
Last edited by Quickfoot on Mon Feb 02, 2015 9:37 pm, edited 1 time in total.

notmyhand
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Re: Taking a giant pay cut - what steps to take?

Post by notmyhand » Mon Feb 02, 2015 9:37 pm

niceguy7376 wrote:Will the 50% cut in income meet your expenses or forces you to use EF?
It might be easier to understand if you inform that you are going down from 500k to 250k or 200k to 100k.


The 50% cut will meet our expenses but will probably not meet our expenses + savings goals.

We are going to be going from approximately $170k to ~90k-100k.

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prudent
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Re: Taking a giant pay cut - what steps to take?

Post by prudent » Mon Feb 02, 2015 9:40 pm

I sense it would help your peace of mind to have more cash now, so I would stop contributing to retirement accounts for the time being. And absolutely plan for those irregular expenses - they are just as important as the monthly ones. I assume your new budget stops paying 3x on your mortgage and drops back to the required payment.

If you can handle your expenses indefinitely on the reduced income, you've solved your problem. You didn't say whether you are going to be running a deficit or not.

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Re: Taking a giant pay cut - what steps to take?

Post by tibbitts » Mon Feb 02, 2015 9:42 pm

Quickfoot wrote:I'd say bathroom remodel is on hold. If the bathroom isn't functional and you only have one then spend the least you have to for it to be functional.

Given that it's very possible oil prices will remain low for years and the cost cutting in the industry hasn't even really kicked in yet I would stop paying extra on the mortgage and beef up the emergency fund as much as you can. If things stabilize you can always make a large one time payment on the mortgage. Keep in mind contractor reductions are not layoffs, they are cost cutting so contractors are a great way for employers to reduce headcount without getting killed in the press for cutting jobs (I was a contractor for years).

Your expenses (other than the cell phones) are reasonable. Switching to T-mobile or sprint would cut your cell phone plan in half and there are many other options available. Since you are in a contract on TV rather than canceling see if they will allow you to suspend your service (directv and dish will let you do this, many cable companies will as well) and if they wont then downgrade to the lowest plan that meets your contractual needs.

This may or may not apply to the OP, but depending on where work is located, it's very possible that only one cell network will work at all. It may be that the phones are crucial to work and the best possible coverage is absolutely necessary.

livesoft
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Re: Taking a giant pay cut - what steps to take?

Post by livesoft » Mon Feb 02, 2015 9:47 pm

You are only 25 and living high on the hog. Go back to living like a student and you will be fine with $90K of income. Actually, that's quite a lot of income given that your expenses appear to be under $30K. The main step to take is to stop spending on the mortgage and retirement plans so much.
Last edited by livesoft on Mon Feb 02, 2015 9:48 pm, edited 1 time in total.
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notmyhand
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Re: Taking a giant pay cut - what steps to take?

Post by notmyhand » Mon Feb 02, 2015 9:48 pm

tibbitts wrote:
Quickfoot wrote:I'd say bathroom remodel is on hold. If the bathroom isn't functional and you only have one then spend the least you have to for it to be functional.

Given that it's very possible oil prices will remain low for years and the cost cutting in the industry hasn't even really kicked in yet I would stop paying extra on the mortgage and beef up the emergency fund as much as you can. If things stabilize you can always make a large one time payment on the mortgage. Keep in mind contractor reductions are not layoffs, they are cost cutting so contractors are a great way for employers to reduce headcount without getting killed in the press for cutting jobs (I was a contractor for years).

Your expenses (other than the cell phones) are reasonable. Switching to T-mobile or sprint would cut your cell phone plan in half and there are many other options available. Since you are in a contract on TV rather than canceling see if they will allow you to suspend your service (directv and dish will let you do this, many cable companies will as well) and if they wont then downgrade to the lowest plan that meets your contractual needs.

This may or may not apply to the OP, but depending on where work is located, it's very possible that only one cell network will work at all. It may be that the phones are crucial to work and the best possible coverage is absolutely necessary.


I just looked at coverage maps and only Verizon is out by our house. It looks like we might be able to switch to a less expensive plan though. Does anyone know of any discount phone companies that work on Verizon's network before I go talk to Verizon?

Thank you so much everyone. I am greatly appreciating the feedback.

tibbitts
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Re: Taking a giant pay cut - what steps to take?

Post by tibbitts » Mon Feb 02, 2015 9:55 pm

notmyhand wrote:
niceguy7376 wrote:Will the 50% cut in income meet your expenses or forces you to use EF?
It might be easier to understand if you inform that you are going down from 500k to 250k or 200k to 100k.


The 50% cut will meet our expenses but will probably not meet our expenses + savings goals.

We are going to be going from approximately $170k to ~90k-100k.

$100k is still far above average income, especially for your age, everywhere except on this forum. That assumes that you're not taking business expenses out of that $100k, of course - that your profit is $100k/year, not, say, $50k/yr. Most households get by with more like $50k income. Your expenses seem very reasonable. You don't have to live like a student; you just have to live with a little less cushion than you have been.

Almost everyone on this forum has savings/investing goals that are way beyond what's considered reasonable by everyone else. So as with your income, you're saying you're worried about becoming merely well-above-average, vs. truly exceptional.

poker27
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Re: Taking a giant pay cut - what steps to take?

Post by poker27 » Mon Feb 02, 2015 9:56 pm

Obviously this is extremely unfortunate, but as others have said, yall are still doing very well, especially given your low expenses. It sounds like you guys saved or invested a ton of money while you were rolling in the dough, which is great. I would take a step back and compare your situation with others your ages, you would most likely be very far ahead. Are there any pluses to this temporary situation? More time at home? Less stress?

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Whit
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Re: Taking a giant pay cut - what steps to take?

Post by Whit » Mon Feb 02, 2015 9:56 pm

If you are worried about your budget, I would stop the 3X mortgage payments and pause the Ira contributions to pump up your cash reserves. You can always max Ira contributions later in the year (or early next year) and you can lump a mortgage payment later if your income stabilizes, or does not decrease as much as you think it might.

notmyhand
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Re: Taking a giant pay cut - what steps to take?

Post by notmyhand » Mon Feb 02, 2015 9:59 pm

livesoft wrote:You are only 25 and living high on the hog. Go back to living like a student and you will be fine with $90K of income. Actually, that's quite a lot of income given that your expenses appear to be under $30K. The main step to take is to stop spending on the mortgage and retirement plans so much.


Yes, I think even if we factor in the medical bills, upcoming dental bills, and irregular payments we are up to between 40-45k. So we are very well below our new income and actually have about a years worth of EF at this new level. Thank you for helping me realize that. Last year was the first year that we were able to max all retirement accounts and I was not anticipating us being unable to continue to do the same. But I guess that is why we plan.

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Watty
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Re: Taking a giant pay cut - what steps to take?

Post by Watty » Mon Feb 02, 2015 10:09 pm

There have been a couple of times when I have been concerned about being laid off and one of the things that I did was to calculate how long I could stretch out my money if I had to. You already have an eight month emergency fund. If your income drops a lot it does not sound like it is likely to completely go away so that would add additional time to the point where your run out of money. In a dire situation you could also withdraw your withdraw Roth contributions if you had to. If your work did get real slow you could also find some other employment even if it does not pay as much.

Take a deep breath and breath easier. I don't have all the numbers but all the expenses you listed look like they are only about $3,000 a month so it sounds like you have a long time that you could survive OK.

It would be good to do a dummy tax return to see what the after tax impact will be with the reduction in income. If your gross income is reduced by a third then it is likely that your after tax net income will be reduced by a smaller percentage.

Track your spending closely to be sure you know where all the money is going.

I would love to keep saving but is that foolish until our income returns?
.....
Would the first saving step to cut be the extra mortgage payments?


Much of the savings can be done up through December and still be on the 2015 taxes. For anything that can be deferred until then I would just accumulate the cash and wait until later in the year to decide what to do with the cash.

On the mortgage you could save up that money then if you want to pay it down in a year or two ask the lender if they will "recast your mortgage" (Google this). If they will then you could do something like pay off 20% of the mortgage all at once and your mortgage payment would also be reduced by 20%.
Last edited by Watty on Mon Feb 02, 2015 10:18 pm, edited 1 time in total.

staythecourse
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Re: Taking a giant pay cut - what steps to take?

Post by staythecourse » Mon Feb 02, 2015 10:17 pm

As corny as it sounds I would take it one day at a time. See how much you can cut down your expenses and find out what your delta will be after subtracting those expenses from your paycheck. Whatever is left over I would beef up my EF to 1-2 yrs. I know it isn't sexy, but the reality is that with both of you in the EXACT same field AND same employment situation (contractors) you are about as undiversified as a couple can be in a financial sense. There are way too many situations that can cause you whole income to go down the tubes or suddenly go back to what it was before overnight. The best way to prepare for worst case situations is having a GREAT EF. The problem with cash on hand is no one appreciates liquidity until you don't have it when you need it. Your in one of those situation it will be great financially and emotionally to know you have a solid 1-2 yrs. EF for worst case scenarios.

Whatever is left over after that put in savings. It isn't perfect and is not what you guys planned for, but that is life. You will do fine as level headed folks who plan ALWAYS do well at the end of the day/ investing life, but that doesn't mean you can't go through serious bumps in the road like this one. There have been MANY successful folks on this board and in life that got their DESPITE not having a perfect track record from point A to point B.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

notmyhand
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Re: Taking a giant pay cut - what steps to take?

Post by notmyhand » Mon Feb 02, 2015 10:24 pm

tibbitts wrote:
notmyhand wrote:
niceguy7376 wrote:Will the 50% cut in income meet your expenses or forces you to use EF?
It might be easier to understand if you inform that you are going down from 500k to 250k or 200k to 100k.


The 50% cut will meet our expenses but will probably not meet our expenses + savings goals.

We are going to be going from approximately $170k to ~90k-100k.

$100k is still far above average income, especially for your age, everywhere except on this forum. That assumes that you're not taking business expenses out of that $100k, of course - that your profit is $100k/year, not, say, $50k/yr. Most households get by with more like $50k income. Your expenses seem very reasonable. You don't have to live like a student; you just have to live with a little less cushion than you have been.

Almost everyone on this forum has savings/investing goals that are way beyond what's considered reasonable by everyone else. So as with your income, you're saying you're worried about becoming merely well-above-average, vs. truly exceptional.


Yes, that'll be net profit but before payroll and personal income tax.

Your point is exceptional. I do feel extremely stressed that our savings rate will be significantly smaller.

mhalley
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Re: Taking a giant pay cut - what steps to take?

Post by mhalley » Mon Feb 02, 2015 10:36 pm

Verizon has a new plan for 140 for 4 lines
http://www.verizonwireless.com/landingp ... verything/
Pageplus cellular runs on verizon.

https://www.pagepluscellular.com/plans/
Mike

notmyhand
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Re: Taking a giant pay cut - what steps to take?

Post by notmyhand » Mon Feb 02, 2015 10:40 pm

Watty and Staythecourse,
Your words are exactly what I needed. I was expecting this at some point, just not so soon. It feels like we did a lot over the past few years to get here that we thought we would enjoy it for at least a little bit but I am sure everyone here can relate to that.

I need to take a deep breath and realize that this situation isn't completely dire for us. We need to decrease our spending, track every penny, and save what we can. As long as things don't get worse, we should make it to the other end of the tunnel. We have another month of this income coming in due to prior invoices so we can add another few weeks to our EF. Our friends in the field are afraid of losing their homes, at least we won't be there anytime soon, hopefully.

This forum is amazing. I am beginning to feel a lot more in control than I did earlier today.

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Re: Taking a giant pay cut - what steps to take?

Post by Saving$ » Mon Feb 02, 2015 10:50 pm

I don't see the problem.
You have annual expenses in the $40-$45k range, and your income is dropping to the $100k range. Plus you have 8 months of emergency fund ($25k?) and fully funded HSA and Roth, both of which you can pull from relatively easily (but not replenish) and 401ks.

First, suspend contributions to the solo 401k. You can re-evaluate later in 2015; if your situation changes you can fund them later in the year.
Keep putting the money in the Roth and HSA. You can always get it out if the money is needed.
I would proceed with the bath remodel as long as the remaining to pay is under $10k. You have the money and no reason to lower your home value, and stress yourself with a 1/2 done bath.

Second, figure out what you are going to do to change the course. For some, $40-$45k expenses with $100k income would be fine and you don't need to change course. For others this is a problem. Biggest challenge I see is, if I understood correctly, both you and your husband work for the same client, and most of your income is from that client. Too many eggs in one basket. Diversify. See if one of you can get a W-2 job. See if you can get other clients, if one of you can skirt the edges of your industry so you are still familiar with the work, but not as susceptible to downturns in the core sector. Start networking. Re-evaluate in 2, 4 and 5 months.

August
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Re: Taking a giant pay cut - what steps to take?

Post by August » Mon Feb 02, 2015 11:51 pm

I can relate to this thread a lot and am curious to read everyone's advice (not trying to hijack the thread or anything). I also work in a cyclic industry though it is weather dependent rather than oil/energy dependent. The best advise I received when I started is try to save a one year emergency fund. Once you get that saved up, aim for two years. At first I thought this was overkill, but given we haven't had a major storm since Sandy, I'm glad I had the extra cash. (Not that I'm wishing storm damage on anyone! But they are the bread and butter of my industry).

It sounds like you are in a good place with your necessary expenses below your projected income. I would defer retirement contributions and extra mortgage payments and instead concentrate on building up a cash cushion. If it's not needed you can always do a large contribution at the end of the year. I'd continue with the bathroom renovation since it's already half paid for and you are not in a dire cash crunch, but I'd try to make sure your contractor sticks to the budget.

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Re: Taking a giant pay cut - what steps to take?

Post by TradingPlaces » Tue Feb 03, 2015 12:01 am

notmyhand wrote:
niceguy7376 wrote:Will the 50% cut in income meet your expenses or forces you to use EF?
It might be easier to understand if you inform that you are going down from 500k to 250k or 200k to 100k.


The 50% cut will meet our expenses but will probably not meet our expenses + savings goals.

We are going to be going from approximately $170k to ~90k-100k.


$90K in income, and $2.5K a month in expenses. You will be fine.

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Re: Taking a giant pay cut - what steps to take?

Post by TradingPlaces » Tue Feb 03, 2015 12:10 am

Saving$ wrote: Too many eggs in one basket. Diversify. See if one of you can get a W-2 job. See if you can get other clients, if one of you can skirt the edges of your industry so you are still familiar with the work, but not as susceptible to downturns in the core sector. Start networking. Re-evaluate in 2, 4 and 5 months.


+1

dolphinsaremammals
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Re: Taking a giant pay cut - what steps to take?

Post by dolphinsaremammals » Tue Feb 03, 2015 8:01 am

It's worth calling Consumer Cellular and seeing if they have coverage in your area. My Doro 618 phoneeasy was $60, no contract, $15 a month for 200 minutes plus $2-$3 fees. Native English speaking customer service reps.

I would look at diversifying your work from oil.

Crow Hunter
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Re: Taking a giant pay cut - what steps to take?

Post by Crow Hunter » Tue Feb 03, 2015 8:26 am

notmyhand wrote:
tibbitts wrote:
Quickfoot wrote:I'd say bathroom remodel is on hold. If the bathroom isn't functional and you only have one then spend the least you have to for it to be functional.

Given that it's very possible oil prices will remain low for years and the cost cutting in the industry hasn't even really kicked in yet I would stop paying extra on the mortgage and beef up the emergency fund as much as you can. If things stabilize you can always make a large one time payment on the mortgage. Keep in mind contractor reductions are not layoffs, they are cost cutting so contractors are a great way for employers to reduce headcount without getting killed in the press for cutting jobs (I was a contractor for years).

Your expenses (other than the cell phones) are reasonable. Switching to T-mobile or sprint would cut your cell phone plan in half and there are many other options available. Since you are in a contract on TV rather than canceling see if they will allow you to suspend your service (directv and dish will let you do this, many cable companies will as well) and if they wont then downgrade to the lowest plan that meets your contractual needs.

This may or may not apply to the OP, but depending on where work is located, it's very possible that only one cell network will work at all. It may be that the phones are crucial to work and the best possible coverage is absolutely necessary.


I just looked at coverage maps and only Verizon is out by our house. It looks like we might be able to switch to a less expensive plan though. Does anyone know of any discount phone companies that work on Verizon's network before I go talk to Verizon?

Thank you so much everyone. I am greatly appreciating the feedback.


Straight Talk (found at Wal-Mart in my area) runs on the Verizon network and is roughly 1/2 the cost of a similar Verizon plan although you have to buy your phone.

My wife just converted to a smart phone a week ago. I think the phone was roughly $90 (Samsung) and the plan is $45/month for unlimited data although I believe they throttle you down after a certain data level.

I still use a dumb phone and it was $45 for the phone and ~$35/month.

Coverage is identical to Verizon in my area.

rooms222
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Re: Taking a giant pay cut - what steps to take?

Post by rooms222 » Tue Feb 03, 2015 10:34 am

For Straight Talk, just make sure it is a Verizon phone you buy. For Bring Your Own Device, Page Plus is better. Believe Consumer Cellular is ATT, so no good per OP.

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Watty
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Re: Taking a giant pay cut - what steps to take?

Post by Watty » Tue Feb 03, 2015 11:51 am

On all the talk about cell phones just remember that it is like a key part of your business and missing a clients call could cost you more than any savings. You can cut down on some features or your parents phones but I would be cautious about switching to a different network until you are sure that you can get good coverage.

Gropes & Ray
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Re: Taking a giant pay cut - what steps to take?

Post by Gropes & Ray » Tue Feb 03, 2015 12:46 pm

Hang in there. those of us who depend on the O&G industry for our pay will be fine. The world isn't going to stop needing oil and gas.

Diversifying isn't a bad idea, though. If you are a landman, consider doing some work for telecom. I know that petroleum landmen sometimes look down on telecom, but it's very similar work, and it has paid a good portion of my bills.
Last edited by Gropes & Ray on Tue Feb 03, 2015 1:06 pm, edited 1 time in total.

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Re: Taking a giant pay cut - what steps to take?

Post by Grt2bOutdoors » Tue Feb 03, 2015 12:55 pm

notmyhand wrote:Watty and Staythecourse,
Your words are exactly what I needed. I was expecting this at some point, just not so soon. It feels like we did a lot over the past few years to get here that we thought we would enjoy it for at least a little bit but I am sure everyone here can relate to that.

I need to take a deep breath and realize that this situation isn't completely dire for us. We need to decrease our spending, track every penny, and save what we can. As long as things don't get worse, we should make it to the other end of the tunnel. We have another month of this income coming in due to prior invoices so we can add another few weeks to our EF. Our friends in the field are afraid of losing their homes, at least we won't be there anytime soon, hopefully.

This forum is amazing. I am beginning to feel a lot more in control than I did earlier today.


I know this is coming a bit late to your original post and Staythecourse has already said it - when your faced with uncertain income/job stability you have to throw generic advice out the window and create your own custom advice particular to your situation. As noted above, holding a 3-6 month e-fund is only beneficial if you are able to recover from your emergency within 3-6 months. Since your incomes are both dependent on the same industry/employer, this downturn may be longer lasting or it may be shorter than you think. That said, at the minimum a 2 year e-fund should be the goal eventually, and other assets even if destined for retirement some should be held in a taxable account that could be accessed after 2 years has past. My earlier posts from years ago advocated staying more liquid and applies to most folks except those with extremely stable incomes or occupations. Also, living beneath your means (which you have done) and not being overly leveraged with the use of exotic mortgages like ARM's and use of margin in your investment accounts is also beneficial. Unfortunately, your industry is not the only ones who've been impacted by economic conditions, some industries have been going through this pain since the 2009 and still haven't recovered. I don't think it will get that bad for o&g, but you never know.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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