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.
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
Transitioning to a new career often means starting from a lower position on the salary ladder. Making less money doesn’t have to be a deal-breaker, but it’s helpful to plan for a temporary dip in income before you switch roles. This will help you manage your finances more effectively during the transition. Ultimately, if the long-term benefits of switching careers (doing something you love, leaving a role that was burning you out, having more time with family, etc.) outweigh the short-term financial setbacks, go for it–just with a plan.
Possible loss of promotions in your current trajectory
Leaving an established career path may mean missing out on potential promotions and salary bumps. For example, individuals with consistent employment in the same field see an average annual salary growth of 2-3%, according to a study by the Bureau of Labor Statistics. Before moving into a new field, research the potential for advancement as well as the typical salary range.
Giving up employer contributions to your retirement plan
Your salary and position on the career ladder aren’t the only things you may be giving up. If you’re transitioning to freelancing or starting your own business, you’ll also give up employer contributions to your 401(k). This can amount to an extra 4-6% of your salary, depending on the amount of your employer’s match.
Cost of going back to school or completing a retraining program
It can be hard to break into a new industry without prior experience or the right credentials. However, the average annual cost for graduate tuition and fees rose approximately 4% for the 2023-2024 school year. If you need to go back to school or retrain to move into your next role, explore scholarships, part-time programs, and online learning options to offset the cost of education.
Fees paid for career coaching or resume help
Investing in career coaching and professional resume services can help with your transition, but these services are also another expense to consider. For example, a career coaching session can cost upwards of $200 per hour. Before signing up for this kind of assistance, weigh the benefits of these services against their cost and ask for references before choosing a coach or resume helper.
Equipment purchases, such as a new computer
Finally, think about any equipment purchases you may need to make. For example, you may need a new computer to conduct your job search or run your business. You may also need new clothing for your career switch–such as if you’ve been working from home but will now commute to an office.
To sum up this section, no one said it was easy to follow your dreams. If you’re still committed in spite of the challenges, 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!
Make sure the bills get paid
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.
Taxes
You may experience changes in your tax situation after leaving your current career. Talk to an accountant or tax advisor about the implications, especially for the self-employed and business owners.
Dieterich Bank is here to help!
Whether you’ve had a career transition forced on you 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, or checking account.
