You can expect to hold at least 12 different jobs during your prime working years, according to survey results from the U.S. Bureau of Labor Statistics on men and women born between 1957-1964. For younger generations, it’s not just jobs and employers that change. Many people also daydream of a change in career, whether that means going back to school or starting your own business. Advances in technology, the Internet, and social media have made it easier than ever for people to learn about other fields or turn a passion into a paycheck.
If you’ve been dreaming of a career transition, or find one forced on you by a layoff, Dieterich Bank is here to help. While you paint the big picture of your career dreams, we’ll fill in the financial details. In this article, we offer financial advice for anyone who is taking time off to plot their next move, going back to school, and/or launching a new business or freelance career. From preparing your budget to replacing corporate benefits and preserving your retirement savings, here’s what you need to know about the financial implications of switching careers.
Consider the financial downsides
We don’t want to rain on your parade, so let’s get the risks out of the way first. Reviewing this list will help you confirm your commitment and willingness to sacrifice to achieve your new career goals.
- The opportunity cost of moving down the salary ladder
- Possible loss of promotions in your current trajectory
- Giving up employer contributions to your retirement plan
- Cost of going back to school or completing a retraining program
- Fees paid for career coaching and/or resume help
- Equipment purchases, such as a new computer
No one said it was easy to follow your dreams but if you’re still committed, let’s look at what you can do to keep your finances in check during your career transition.
Before you quit your job
The upside to planning your transition (as opposed to getting laid off) is that you determine when you leave your current career. Take advantage of this by getting your financial house in order and prepping for the challenges to come. These tips can be used by anyone, since we should all be financially prepared for a job loss, too.
Pay off as much debt as possible
Debt is a claim on your future income. If your future income is going to be uncertain or reduced, you don’t want to be locked into fixed monthly debt payments.
Plump up your emergency savings
You may need to tap this account for more than emergencies while you’re unemployed, so throw all the cash you can at it now.
Get used to living on less--now
It’s better to ease into a tighter budget than to experience the shock of sudden spending cuts. While time is still on your side, go through your last month’s bank statement with a fine-tooth comb. Where is your money actually going and how could it be redirected? For example, if you eat out a lot, give yourself a trial run with a week of brown bag lunches and dinners at home. While still employed, you can redirect what you’d usually spend at restaurants to your savings account. During the transition, this sum will simply be cut from your budget.
Make or delay large purchases
Are you looking to buy a new car or home? Think you might need a personal loan or home equity loan to finance part of your transition? Either do it before you quit your job or plan to wait a while. It’s much harder to get approved for financing when your income is irregular and a reduced income will lower your borrowing power.
While you are between jobs
Once you pull the plug on your old career, it’s time to put that financial planning into action!
Keep a list of your fixed monthly bills such as housing, utilities, etc. These are the bills that need to get paid to avoid a major disruption in your life. If you live with a partner, their salary may be able to cover the bills. If not, you can draw from savings or take on part-time work to make ends meet.
Replace employer benefits
Think through what you’ll need to replace right away, such as medical insurance, and what you can live without. If married, can you join your spouse’s health insurance plan? If not, you may be able to purchase health insurance through the exchanges. Depending on your income, you may also qualify for your state’s Medicaid insurance. And any money you had in a Health Savings Account (HSA) is yours to keep--and use--even after you leave your job.
Life insurance is the other important benefit to consider. You probably had some amount through a group term plan from your employer. Now that you’re on your own, you can purchase your own term or whole policy. Everyone should have at least a small amount of life insurance, even if you don’t have dependents, to cover funeral expenses in the event of your untimely death.
Do something with your 401(k)
If you go straight to another job, you can rollover your old 401(k) into your new one. But if you’re going to be in between jobs for a while, you may want to convert your old 401(k) to an Individual Retirement Account (IRA). IRAs have the same tax benefits and your retirement savings will continue to grow while you’re in transition. Whatever you do, don’t cash out your 401(k). If you’re younger than 59.5, you’ll incur fees and tax penalties for early withdrawal.
You may experience changes in your tax situation after leaving your current career. Talk to an accountant about the implications, most notably for the self-employed and business owners.
Dieterich Bank is here to help!
Whether you’ve had a career transition forced on you by the pandemic or you’ve been planning your big move for a while, we can help you build the necessary financial cushion to take that big leap of faith. Contact us today or visit your nearest branch in Illinois to open a new savings, checking, or retirement savings account.