Significant career changes occur for many reasons – relocation, career opportunities, even personal reasons such as a spouse’s job or academic advancement. If you are on the cusp of a major career change, you are not alone.
A study by the Bureau of Labor Statistics found that, on average, workers held more than 12 jobs between the ages of 18 and 52. It’s rare these days to stay in one job for more than five years, let alone your entire career. Here’s how to financially plan for a major career change.
Top up your emergency fund
Perhaps the most important financial step you can take when changing careers is securing yourself a safety net or, in this case, an emergency fund. A contingency fund is a separate savings account specifically designed for unexpected expenses you may have. Think unexpected illness, home renovation, or, you guessed it, a job change.
Experts suggest saving at least six months in living expenses in your emergency fund. But keep in mind that this magic number is not for everyone; it may be slightly more or less, depending on your bills, debts, or if you have a dependent family to support. If that amount seems discouraging, start with a $ 1,000 savings goal and move on.
Your emergency fund must be relatively liquid so that you can access it if you need it. Consider putting it in a high yielding savings account, money market account, or shorter expiration CD.
Plan for the future
With a major career change, your income is likely to plummet. Whether it’s a few weeks or even a month, you will need to come up with a financial plan. First, make a list of all your monthly expenses and bills. Include due dates for any bills such as mortgage / rent payments, student loans, credit card bills, utilities, even any subscriptions you may have (although now might be the perfect time to get these things off your budget) …
Then make sure you have cash to cover these costs. This could mean saving money each month ahead of a career change, or investing in your emergency fund. Do not panic! That’s what it’s for.
This is also a great time to look into the future. Before starting a new job, create a new budget based on your new salary. This could include extra wiggle room for extra services, or earmarking extra funds for long-term goals like retirement or the big trip you would like to take. This is especially true if your new position has a pay rise. If you don’t plan on using that money, you might be surprised at how quickly you can spend it.
Ask for more money
A mentor once told me, “Decide what rate or salary you deserve. Now double it. ” While this is not possible in all areas, changing jobs is still a great time to get a much needed boost in your income. And given that the average annual increase is only 3%, otherwise you may not have the opportunity to significantly increase your salary for quite some time.
It is worth repeating. A career change is a great time to ask for more money. As long as the number is realistic and you do it professionally, a potential employer might say no to the worst.
Don’t forget your 401k – but don’t waste it
When planning a major career change, you also need to make a plan for your 401k retirement account or other retirement accounts if managed by your prospective employer. While you can usually leave 401k under the control of your previous company, this is not always a good idea as it is easy to forget about. This money will turn into “orphaned 401 thousand accounts”, forgotten funds that are becoming more common.
When changing jobs, it is best to opt for a direct transfer from your current retirement account to another retirement account. For example, you can transfer your current 401k to a new IRA and then open a new 401k with your new employer. Or, if you’re lucky, your new employer can allow 401KB outright rollover, which saves you a lot of paperwork and headaches of managing multiple retirement savings accounts.
Some employers don’t have the best systems for rolling over retirement accounts when you leave the company, they even go so far as to send you a paper check with your hard-earned retirement savings. Don’t use this as an opportunity to spend your 401k. Transfer it directly to another retirement account like an IRA. Trust us. And that’s not to mention the fees and taxes you might have to pay if you exit your retirement account early.
You may also be eligible to receive other benefits through your previous employer, such as unused vacation pay or personal days. Be sure to read your employee handbook and speak to HR so that you can understand the policy. You don’t want to leave money on the proverbial table.
Stay healthy
Choosing the right health insurance is another key aspect of a successful career change financially. Aside from open sign-up periods, an important life event (such as a job change) is the only time you can change or change your plan.
This means you have to think carefully about which plan is right for you and your family and the monthly costs incurred. Be sure to consider whether your spouse or dependents will also be covered by your insurance, and be sure to compare your plan costs with your spouse’s, if applicable.
Final thoughts
A major career change can be stressful both financially and personally. But planning ahead and taking strategic steps can go a long way towards making a career change a boon for both your career and your budget.