A career change can be an exciting time in your life, but don’t start the transition before creating a plan for your finances.
Call it a sign of economic prosperity—Americans are quitting their jobs at an increasing rate. According to the Bureau of Labor Statistics, job quits continue surpassing layoffs and discharges—a trend that started in July 2011. In the month of March alone, some 3.4 million people quit their job, up from 3 million quits in January 2018.
Changing careers can be an exciting time, and when the job market is hotter than ever with record low unemployment rates, there may not be a better time than now to take a chance on a new start. For some, a career change means chasing a long-sidelined passion, while for others it means exploring a new industry.
While the promise of something new is sure to disrupt your current routine, it may also mean a disruption for your finances. Changing your career might mean entering a lower-paying industry, starting on the bottom floor with a lower starting salary or taking on a hefty cost to relocate.
In this post, we’ll offer some tips on how to manage your career transition without jeopardizing your finances.
- Adjust your expectations about your new paycheck
- Start living on your new salary now
- Make your career change a part-time job
- Be prepared to miss a paycheck (or several)
- Take care of important medical appointments before you jump ship
- Use up your FSA or transit benefits
- Don’t forget your nest egg
- Ask about relocation benefits
- Bolster your network
Adjust your expectations about your new paycheck
Any career change will likely come with a change in pay. For those entering a new industry at a lower level than their previous position, there’s a good chance that will mean a lower salary. With that being said, you can and should still prepare to negotiate.
Do your homework to find out what kind of salaries are common for employees in your new position. Get a clear understanding about what is standard in the industry, and use that to predict what your offer might look like and know what a reasonable salary is to request.
At this point you should also check in and make sure you can afford this transition. If you’re the breadwinner looking at a career with a lower average salary, how will that affect your family? Take this into consideration when you’re looking at major changes to your income.
Start living on your new salary now
In the instance that you will be taking a significant paycut with your new career, you need to change your budget accordingly. As soon as you have an idea of what your new budget will need to look like, it’s a good idea to start making adjustments.
In addition to how much money you have coming in, some costs may change with your new career as well. When you may have driven to your previous job, perhaps now you have to pay for public transportation or vice versa. If your new career requires you to move, you may be moving to a location with a higher cost of living.
Lisa Lewis, a Colorado-based career coach, went from working as an advertising manager to launching her own business as a career advisor in 2016. The transition cut $10,000 from her annual income when she first took her business full time.
“I knew I needed to minimize my overhead costs to be able to take on more financial risk,” she said.
One of the first things to go was her brand new Acura SUV. She swapped it out for a 2005 Toyota Corolla.
“[I knew] that paying hundreds of dollars in a car payment every month would make my transition riskier,” she said. And playing it safe in that department paid off in the end—despite her initial salary setback, Lewis was able to build her business, matching her previous income in her first year, and surpassing it thereafter.
Make your career change a part-time job
If you’re entering a new industry, find out what it will take to give you a leg up when you’re applying to jobs. You may need certain certifications or training to be a desirable candidate. Perhaps you need to go back to school and obtain a higher degree or a different degree to help you break into an industry.
For a smoother transition, sign up for any courses or certification trainings you might need while you’re still in your current job. You may be able to squeeze them in after work or on weekends. This way, you get a steady income and benefits while paving your new path gradually.
If you’re heading into a new industry, you may consider exploring that industry through internships or gigs you can do on the side before you commit to seeking full-time employment.
For those who are aiming to launch their own business like Lewis, quitting your job cold turkey might not be an option. It might make more sense to work on your new venture part-time after hours until you feel prepared to take off the training wheels.
According to Lewis, she started slowly, building her business part-time to see its potential to become a full-time venture.
“It took me 10 months to build from zero clients to a predictable, stable part-time income,” she said. “When I was generating enough revenue from the side hustle to justify making the leap to full-time, I made the decision to leave.”
Be prepared to miss a paycheck (or several)
Though there are plenty of movies that portray some character reaching the last straw and walking away from their career to chase a different dream or find love or whatever else—that’s probably not the best plan for you. If you’re looking to change careers—whether that means leaving architecture to be a chef or quitting as a fashion designer to be a model—you should plan ahead of time.
Say you’ve secured a new position, you’ve given notice at your current job, and you’ve arranged a week off in between leaving and starting at the new job. When you start at the new job, there’s likely going to be a bit of a delay before you see your first paycheck. It can be difficult to time your plan so that you don’t miss a pay cycle, so you need to be prepared to cover your bills should that happen.
If you’re leaving your job without a new one lined up, be sure you’ve got ample cushion in your savings account to carry you over. For some, three to six months’ worth of savings might be sufficient. But if you’re planning an extended hiatus or your new venture doesn’t come with the promise of stable income, you should bank on saving even more if possible. You might even take out a personal loan or explore other options to keep your finances on track while you’re not getting a paycheck.
Take care of important medical appointments before you jump ship
Along with potentially giving up a steady paycheck during your career transition, you could also be forfeiting benefits like employer-provided healthcare. Gap insurance might be available through COBRA or the Healthcare Marketplace, but your care might cost substantially more.
Depending on how long you anticipate a gap in coverage, it’s a good idea to take care of annual check-ups or planned procedures before you jump ship.
Use up your FSA or transit benefits
Take a look at your current employer’s benefits terms. If you have perks like a flex spending account or transit benefits, your contributions may not be accessible after you leave the company.
William Nunn, a financial planner from Louisiana, left a big bank to launch his financial planning firm earlier this year. What he didn’t realize was that he’d be forfeiting the $2,000 he’d built up in his employer’s medical reimbursement account. He learned too late he had just until the end of the month in which he resigned to use his funds.
“I was not happy to find out I was going to have to use savings to pay for deductibles and copays,” Nunn advised. “Find out these little details.”
Make sure you spend what you have in those accounts in order to avoid losing it when you leave. You can quickly find FSA-eligible items at FSAstore.com and drugstore websites like CVS and Walgreens have special sections for FSA-approved items.
Don’t forget your nest egg
While it is possible for you to leave your 401(k) under the administration of your former employer, that option is not available to everyone. And if it is available, it may not be the best choice, especially if you fear losing track of the account or could have better plan options with your new employer.
Initiate a rollover to your new 401(k)
Take a look at both plans and find out if your new plan would incur higher fees or fewer investment options. If you’re not happy with the new plan, and you have the option to leave your 401(k) with your previous plan provider, go for it. Most retirement benefit plans offer free 401(k) rollovers when you switch employers.
You might decide to rollover your old 401(k) to your new provider simply to keep things more simple. If you’ve switched jobs a few times, it can be hard to keep track of several accounts in different places.
Open an IRA
Some might decide to transfer their 401(k) to an IRA or SEP IRA. This is likely the best option for folks transitioning into a position without an employer-sponsored program, like freelancers or entrepreneurs starting their own business.
Don’t cash it out
Cashing out your 401(k) when you leave a job is an option, but we highly advise against it. Withdrawing funds from your 401(k) before age 59.5 can mean paying hefty taxes and early withdrawal penalties on the amount.
Ask about relocation benefits
If your new career requires you to relocate, find out if the company pays for any portion of your moving costs. Everything just mentioned about your budget would also be hugely affected if you also have to pay out of pocket to relocate.
Consider the benefits of your new job in relation to the cost for you to take it. If the transition will be costly, but you’d be able to make up for it rather quickly once you’re settled, it might be worth it. But if the transition is going to derail your finances, you may want to consider other options.
Bolster your network
Changing careers can be a huge milestone. Aside from the technicalities like money and job prospects, it’s a good idea to check in with yourself to make sure you’re making the right move.
Talk to your family and trusted friends as well to make sure you have the emotional support to go through this change. If your finances do get strained, could they have your back?
Additionally, start building a community within your desired industry. Find networking events and conferences to meet contacts and learn more about opportunities and getting into the business. Reach out to industry leaders and ask for advice.
The bottom line
The most important thing is to do what’s best for you, and have a plan (and a backup plan) to see it come to fruition. Think of your career change as an investment. It might be risky, but the return may be well worth it.