When changing careers, planning is everything. Whether you’re making a planned leap into your dream job or searching help wanted ads under less fortuitous circumstances, budgeting for a career transition and having some savings ready and waiting is a shrewd financial play.
Why? If you’re like most Americans, you rely on your regular paycheck to cover basic monthly expenses. In fact, according to an AmeriSpeak® Spotlight on Personal Finance survey from NORC at the University of Chicago, 51% of Americans would have to dip into their savings if they missed a single paycheck. It’s no wonder that any sort of career change can cause financial stress. The easiest way to alleviate that stress is to be ready for a career transition with a safety net.
1. Establish an emergency fund.
You’ll want to maintain an emergency fund whether or not you’re job hunting—you never know when financial disaster may strike. Depending on which expert you consult, your emergency fund should be sufficient for covering three to six months of living expenses.
If you lose your job, for example, it could take months to find another one, in which case you would then need those savings to pay for the basics. Even if you have a planned job change, there may be a transition period of up to a month in which you may need to use your savings until your new paychecks start coming in.
2. Ensure that you’re increasing your income.
When you plan to make a career change, one of your goals should be to increase your income. If you are having trouble creating an emergency fund, for example, a job change could give you the salary boost you need to start putting money aside. You want to save for the future, as well as for emergencies, and so budgeting needs to include a savings strategy.
3. Create a household budget.
When considering a transition, create a household budget. You need to understand your current spending and establish monetary goals to help you with salary negotiations. Create a list of monthly expenditures that includes:
- Fixed monthly expenses such as rent, insurance, utilities, child care, and loan payments
- Estimated variable expenses such as groceries, entertainment, and recreation—be realistic and accurate, and be sure to include fees in your budget calculations, such as credit card interest, internet services, and subscriptions, which all add up
4. Anticipate new expenses.
With a new job may come new expenses. For example, will your commuting costs increase? Will you need a new wardrobe for the job? Will you need to pay more for childcare? Are there additional expenses you need to consider that go with the new job? You might consider revising your budget to include new job expenses to determine what additional cash you may need for the transitional period.
5. Don’t forget to plan for retirement.
Lastly, be sure to take care of your retirement fund. Most companies offer retirement savings plans such as 401(k)s, but many employees unknowingly abandon these funds when they change jobs. In fact, 59% of workers ages 25-34 have at least one orphaned 401(k) account with an average value of $47,000.
Be sure to take your retirement savings with you. You don’t want to cash out your retirement savings because of the tax penalties, but you can also avoid these penalties by rolling that money into your new employer’s 401(k) retirement plan, or moving it into an individual retirement account (IRA). If you have less than $1,000 in a 401(k), your employer may just give you a check, but be sure to roll it over into an IRA within 60 days.
Master budgeting for your next career move.
Career transitions can be both exciting and terrifying. There’s no reason to add money worries to the stress. If you aren’t sure where to start, here are some ideas:
- Use our Budgeting Checklist to get your finances in order.
- Start building an emergency fund with a savings or money market account.
- Talk to your financial advisor about contributing to an IRA.
- Establish a retirement fund for your 401(k) rollover.
If you need help, contact one of our financial experts. We’re here to help.