Making the decision to change careers is exciting. You can easily get caught up in the fervor of leaving behind an old job and experiencing something new. But before you make that switch, be sure you know what you’re giving up and what you’re getting in return. Avoid these common financial mistakes so you can make the most of your new career.
1. The bigger the salary, the better
We all strive to make more money as we grow in our careers. However, don’t forget to look beyond your salary. When making career changes as a young professional, it is important to realize how your employee benefits can impact what you actually take home from your new employer. Your employee benefits may not be as lucrative as they were at your old job. And a bigger salary may be appealing at first, but it could have unforeseen effects, like more tax burden. Weigh all your options when changing careers so you really know what you’re getting.
2. Forgetting about student loans
Most young professionals will graduate college with student loan debt, which means you have to account for how this debt will be paid off. That’s one reason a high-paying career can help increase cash flow and help you feel more comfortable paying off your debt. However, a high-paying career can also cause “lifestyle creep”: when your income rises, so does your standard of living…and in turn, your spending. Finally, depending on how your student loan payments are calculated, the amount you are required to pay each month can increase based on your income.
3. Not setting up an emergency fund
When we’re stuck in a job we don’t like and it becomes too much, sometimes we quit without a plan or a thought about the future. It’s understandable. But if you don’t have an emergency fund in your accounts to cover this sudden life change, it can be damaging. Unfortunately, nearly half of Americans don’t have $400 in the bank reserved for emergencies like these.
If you’re planning on changing careers, or even if you want to have a general emergency fund should you need it, use this rule of thumb: have 6 months of income saved if you are a single-income young professional. If you’re in a dual-income household, save 3 months of income. It may seem like a lot to put aside when you can use it for other things now, but devastating events can happen when we least expect it. Your emergency fund can be a huge relief when you suddenly need it.
4. Not thinking about health insurance…
Thinking about quitting your job? Prepare to spend some of your time between jobs without health insurance. To make the most of your health insurance before you leave your current job, review your employee benefits package and contact human resources. Generally, your health insurance will remain in place through the month you terminate your employment, but it can vary depending on the health plan. There may be options for you after your employment ends, but there are usually additional costs for your health insurance premium.
5. …or other employee benefits you’ll miss
Health insurance isn’t the only additional cost that comes with a career change. You will also likely lose access to disability insurance, dental/vision insurance, and benefits such as an employer-matched 401(k) contributions. Keep in mind that if you are planning on starting a business or self-employment, it could take years for you to earn enough money to be back at your true take-home income, let alone to make up for the benefits you are giving up.
6. Forfeiting employer contributions to your 401(k)
If you left your employer before the 401(k) “vesting period” was complete, you may have to give back some of the money your employer contributed to your accounts. If you’re not sure you’re required to do that, it’s usually stated within your 401(k) plan documents. This can get confusing, which is why discussing these terms with a financial advisor can ease some of the burden for you. A financial advisor can also help you understand your options for the money left in your old employer’s accounts after making a career change.
7. Unnecessarily delaying your financial goals
Some goals in life require a great deal of money to accomplish. Purchasing your first home is one example. There are some exceptions, but mortgage lenders usually consider your last two years of employment when applying for a mortgage. If you’re hoping to buy a home, changing careers at the same time could prevent you from doing that. Don’t forget to consider your other major financial goals that may be affected by a career change.
8. Funding a career change with credit cards
As of 2019, Americans’ average month-to-month credit card debt was $6,849. We love using credit to make purchases in a pinch…or just to get what we want even if we can’t actually afford it. Credit cards can easily become a crutch when we are faced with sudden medical bills, emergency repairs to our vehicle or home, or if we simply don’t want to miss out on experiences with friends and family. With no solid understanding of when income will return to a stable level, it’s easy to overspend and fall behind on credit card payments when between jobs. And even when you start a new career, you may have fallen so far behind that you don’t know how to catch up.
Let a financial advisor be your guide
Starting a new job affects all areas of your life: your family, your schedule, your commute, maybe even your wardrobe and your hobbies. Let a financial advisor guide you through the changes to your finances, which are perhaps affected most of all. Our financial planning team at Guiding Wealth provides the expertise and support you need–and deserve–during this phase of your life.