Any decision to change jobs has financial ramifications. Whether you're making a switch to get more responsibility, more enjoyment, or more freedom, you have to consider money, among other factors.
Basic financial planning will benefit you whether you're switching employers or careers, going back to school to learn new professional skills, or branching out to be your own boss. After reading the tips below, you may also want to contact a certified financial planner to help you tailor your transition strategy.
The Financial Cushion
Financial reserves are a must for anyone who's making a career transition. You should have enough money available to cover all your living expenses during the transition period.
"We advise most clients to maintain a cash cushion of six months," says Micah Porter, president of the Minerva Planning Group in Atlanta. "If you're making a career transition, you'll need to increase the amount of cushion you have if the transition will involve going without a salary while searching for a job."
If you're starting your own business or consulting firm, many financial planners recommend you set aside two years' worth of living expenses, according to the Financial Planning Association (FPA).
Edward Jones, a St. Louis-based company that recruits self-motivated professionals to run their own businesses as investment representatives, offers similar advice for its candidates.
"At Edward Jones, our investment representatives have the opportunity to earn significant income once they build up a strong client base, which typically occurs after the first year or two," says Price Woodward, the principal responsible for recruiting and hiring investment representatives at Edward Jones. "The training compensation and guaranteed payments for the first year in business may require candidates to reduce their standard of living or use money out of savings or rely on a spouse or partner's income in order to maintain their lifestyle during the first few years of being an investment representative."
Necessary Coverage
Before you transition, make sure that you have adequate insurance coverage. If you have health insurance with your current employer, consider continuing that coverage through COBRA. You can also investigate private regular coverage, which can be more affordable if you're single, or you could switch to be part of a spouse's health plan.
Pay attention to any possible retirement benefits or accounts you may have, such as a 401(k). To avoid being taxed, make sure you roll over your 401(k) into an IRA account or a similar retirement savings plan with a new employer.
Loans and Taxes
If you're training for a new career, a student loan can prevent education costs from depleting your cash reserves.
"You don't want concerns about finances detracting from your studies," says Porter. "I would tend to take out a bit more than I thought I might need, with two caveats:
- Average starting salaries in your new career should allow you to repay the loan over time with relative ease.
- The loan should be via an official student loan program, and offer the low interest rates normally associated with those programs."
Paying income tax is another financial matter that you should consider before making a job transition, according to Shannon Wentworth, a marketing consultant and writer based in Oakland, California. This is especially true for people who work for themselves after having worked full-time for an employer who routinely deducted taxes from paychecks.
"Save all your receipts and plan for paying your own taxes," she said.
The Payoff
Wentworth started her consulting business in early 2006 after leaving a corporate marketing job, and she says she's had "a lot of fun" being her own boss.
"I travel more, exercise more, read more, sleep more, and make more money," she says. "I've also at times worked more. It's harder to say 'no' to work when you don't have a steady 9-to-5 job."
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