How to Prepare Your Finances for a Career Change
July 3, 2013
When it comes to making a career change, we usually get caught up in the mechanics of the change itself. Do I have the necessary skills? Can I learn those skills if I don’t? How quickly will I be re-employed? How secure will the new career be? Will I have to make a geographic move?
Those are all important to considerations, but if you have time to prepare for the career change in advance, you might want to take a close look at your finances. The state of your finances can determine your success or failure in a career change as much as any other factor.
1. Cut your living expenses.
One of the more unfortunate aspects of making a career change is that it so often involves a reduction in income. If this will be the case with your career change, it is important that you cut your living expenses to a level that youâ€™ll be able to comfortably afford with your new, reduced income level.
Depending upon how significant the decrease in income will be, you may be able to accomplish this by trimming around the edges of your budget. For example, it may be possible to make enough room in your budget simply by eliminating cable TV, eliminating your landline telephones, and cutting back on groceries and entertainment.
If you expect the reduction in income will be more significant, then you may need to consider making more fundamental changes. This may get into reducing what we might refer to as â€œmacro expensesâ€ â€“ the bigger expenses in life, such as housing and cars.
You may determine for example, that you cannot afford to make a career change with your current $1,500 per-month house payment and two $400 per-month car payments. If so, you may need to consider moving to a less expensive home and eliminating at least one of the car payments. These are major moves to make, but they may be entirely necessary to pave your way into the new career.
2. Get out of debt.
One of the very best ways to lower your living expenses is by reducing or eliminating debt. For example, the elimination of the $400 per month car payment opens up an extra $400 per month in your budget. That will enable you to live more easily on a smaller income.
If your shift into a new career is voluntary, you can take advantage of any time that you have in advance to begin reducing your overall debt level. Of course, credit cards should be the first to go since they have variable rates of interest that could spike at the worst possible time. Right behind those are car loans. They tend to be large payments on relatively small balances, so the sooner they are eliminated the more budget flexibility you will have.
Any debts that youâ€™re able to reduce or eliminate will make your career transition that much easier by easing the financial pressure.
3. Fatten your savings.
Changing careers brings about a certain amount of uncertainty â€“ you are going from a career or job that you know well, to one where you will have to “learn the ropes.” It will be very much like starting all over, and that brings a host of variables.
One of the best ways to prepare for uncertainty is by building a healthy savings account. That will give you money to fall back on for emergencies, or even unexpected disruptions in income. The path into a new career is not always a straight line, so youâ€™ll have to be prepared for whatever circumstances you will face. Think of your savings as a form of insurance just for that purpose.
There is an intangible factor with savings as well. Having a few thousand dollars saved in a safe place can give you the extra confidence that you need to face the challenges ahead. Even apart from the obvious financial benefits, that confidence is always well worth having when youâ€™re facing new circumstances.
4. Plan to continue funding your retirement.
One of the biggest problems with changing careers is that it often causes a disruption in long-term savings, particularly retirement savings. This is especially true if the career transition is accompanied by a drop in income. However, it is important that you have a plan in place to continue funding your retirement through and after the transition.
If you are leaving a company that has an employer-sponsored retirement plan, you may have to consider starting an individual retirement arrangement (IRA) until you are in a secure position to have a more generous plan. You may also need the IRA as a place to park your 401(k) money upon leaving your previous employer.
If continuing to save money for retirement is important while you are transitioning into a new career, itâ€™s probably even more important that you resist the temptation to liquidate any retirement savings that you have accumulated so far. Not only will you face an additional income tax burden and early withdrawal penalties as a result of taking money, but if you drain your plans too low, you can find yourself starting over with your retirement plans, but at a much later point in your life.
The benefits you will receive as a result of withdrawing money from your retirement plans early will not be made up by contributions youâ€™ll be making later. If you cannot save for retirement during the transition to the new career, at least avoid the temptation to withdraw what you already have.
What other financial factors can impact a career change? Leave a comment!
All posts by Kevin Mercadante