Financial Guide to Your Career Switch

Looking for a new career or wanting to start a business? Maybe it’s something you’ve been considering for a while, but never knew where to start. Or maybe you’re a little too eager to dive right into your next professional venture. Considering all of the factors involved — family, location, money — there’s undoubtedly a lot at stake. Having a plan in place to help you map out your career switch will help ease your anxiety and set you up for financial success while reaching your goals. 

Whether you’re looking for a new job within the same industry or a different one, or looking to start a business of your own, you should know exactly why you want to do it, and it should be for the right reasons. If you’re wanting to do it simply just to make money, it shouldn’t be a shock when you end up back at square one months down the road.

“‘What should I be looking for, and how much should I be looking for?’ — those are all valid questions,” says Joseph Brady, certified financial planner and founder of Rock Financial Planning in Arvada, Colorado. “But it’s a lot more about what’s important to you and your values than just how much [you’ll be making].”

As Simon Sinek iterates in his book, Start With Why, why you do what you do should be the backbone of your decision-making process, and the “how” and “what” should follow in that order. Especially if you want to start your own business, you have to know your own “why” before you can become a leader for others. This framework can apply to any career switch, however, and it’s where Brady typically starts the conversation with his clients.

“If you really love what you’re doing, or maybe you hate it, and you want to make sure you’re doing something that’s valuable, try to find something that’s in alignment with that rather than just trying to find a way to make a few extra bucks,” Brady says.

Starting with why will typically add a lot more value to your life that money just can’t provide.

Even the seemingly clear-cut financial expenses of making a career switch can often get overlooked. John Stoj, financial advisor and founder of Verbatim Financial in Atlanta, Georgia, says not to forget to do your research on the different income tax levels in each area as it applies to your switch as well as the different costs of living, which also fluctuate at the local level. 

“Moving from an area with a lower cost of living to an area with a higher cost of living can actually negate any benefits of a raise you might get by moving jobs,” says Stoj. “If you’ve been in your job for a long period of time and have built up seniority or any type of credibility within the company, moving for an extra $5,000 per year in salary isn’t always the best idea.” You should consider the likelihood that you’ll be able to advance in your new career or receive a promotion before jumping into any job offering you a signing bonus or salary increase.

The tradeoff between higher salary and higher living expenses may even be a little more concrete than the opportunities you may be giving up as the result of leaving any job to pursue another. This brings the concept of opportunity costs into play, which is huge to consider throughout any aspect of the job change decision process. This includes the opportunity costs of time, money, and emotional wellbeing.

Monetary opportunity costs also include the expenses of any additional education for your new career as well as the job stability within the industry. If your career change requires you to go back to school for a certain period of time, you’ll be responsible for tuition costs as well as the salary and time you’ll lose in the process. If you’re planning to take a job within a new industry, be mindful of the job stability within that industry because the career you’re pursuing may not guarantee steady work. ¹

If you’re planning to become an entrepreneur and start your own business, on the other hand, these expenses are even more so escalated, as you will become responsible for things like office space, supplies, and technology, which can cut deep into your savings. Additionally, you may be charged with the opportunity cost of giving up your regular steady income, at least during the growth stage of your new business venture, if you choose to go all in at once. 

“For most entrepreneurs, you’ll no longer be receiving a W-2 paycheck. Some people get the opportunity to continue working multiple jobs to offset that, but many people dive into this new gig full time. So you’re giving up that savings that you would normally be putting away on a regular basis.” Brady, of Rock Planning, calls out.

Having outstanding debt when taking on a new career venture can be risky if you are going into it with uncertainty. If you leave your current job before finding a new one, or if you take a new job in an industry that can’t guarantee steady work, you may be putting yourself at high risk of building up debt. There are options, however, if you’re looking to get out of your current situation immediately with no set plan in mind yet.

One option is to take on a part-time job while on the hunt for a new one. ² Maybe this part-time job can be in a related field to the industry you hope to land in and can act as a short term resume booster. At the very least, having a part-time job to fall back on in the meantime will help you mitigate the risk of having your debt pile up until you find the next full-time job that’s right for you.

If you’re seeking to start your own business but your finances aren’t quite there yet, taking on a part-time or freelance job to quickly pay off some debt will allow you more time to set your business plan while getting your debt in shape. Keep in mind that you probably won’t be making as much money in your new business as you think you may be when starting out, so having a good grip on your debt prior to starting is likely to be your best bet to avoid falling deeper into the debt trap. 

“Whenever you start a business, you’re likely not going to make as much money as you think you’re going to make in the first few years,” warns Stoj, of Verbatim Financial. “You always want to double your expected expenses and cut your expected income in half.” Even if you’re on the fast track to paying off your debt, having an emergency fund is never a bad idea and can help you pay off any unexpected debts in the future.

Emergency funds are something that everyone should have in preparation for unforeseen financially-impacting circumstances that may come up, such as a global pandemic. When planning a transition into a new career or business venture, it’s even more important to have an emergency fund in place to cover any costs associated with the change. 

The amount you’ll need to set aside is situational, but it’s better to be more prepared. If you’re married, you should also consider the job security of your spouse as well and be prepared to cover the costs of living if he or she may lose their job within the same time frame.

A strong emergency fund can act as a safety net for your credit during this time. “Create an emergency fund so that if there is a problem, you don’t have to take cash advances or go to payday lenders. When you become responsible for paying them back, that’s when it can impact your credit,” says Stoj. “The more that you can continue to chip away at any debt you have outstanding will continue to help your credit score.” Having a strong credit score going into a career switch will give you the stability and confidence you need.

Again, if you’re a new business owner, you should also be careful not to overestimate your income while the company is taking off. You will also need to up your savings in the meantime to back the company during the growth stage. “I generally would recommend three-to-six months of typical expectation for an emergency fund, but if you have very variable income in your business where some months you have more coming in than others, you need to plan for that. Set aside additional money in the good months to offset bad months,” recommends Brady.

There’s always a possibility that your new job won’t bring you as much joy as you expected, and you might find yourself in the same situation less than a year into the switch. Having an emergency fund can provide you extra security if you end up needing some time to figure things out. ^{3, 4}

You may have several options for what to do with your 401(k) when you change jobs. Your options may depend on how long you were at your previous job, how much you’ve saved, what your new employer’s plan offers, and your goals for the future. Generally, however, you have the option to leave your savings with your previous employer, transfer the money into your new employer’s plan, or roll your savings into an IRA. Checking with a financial advisor is recommended when weighing your options in this case because they can remind you of the bigger picture when it comes to making these short-term retirement decisions.

Retirement planning will look a lot different for you if you’re starting your own business, because now you will not only be responsible for deciding your own plan but also choosing a plan to offer your employees. It’s best to consult with a financial professional when making these choices because they’ll be able to recommend the best options for you based on costs and the needs of your business.