Before you take the plunge and pursue your dreams in a new job or career, it pays to consider the hidden — and not so hidden — costs associated with a job change, and make a plan to ward off a potential budget crisis.
What a career change really costs
If you're making major moves into a completely different field, you've probably already considered the obvious expenses, like additional education and training that may be required, and a potentially long period of time without income, but for less dramatic job changes, there are also less obvious expenses that can throw your long- and short-term finances out of whack.
Understand that there will inevitably be some upfront expenses associated with a career change, and that you will need to make some adjustments and tighten your belt at times to make your budget work.
Reduced or nonexistent health benefits
Your new employer's benefits package may be less generous than your current employer's, perhaps with higher premiums and deductibles, or fewer wellness perks. If you're striking out on your own, you'll have to pay all of the costs for your health insurance. The average cost for a silver plan on the state health insurance marketplaces is around $10,000 per year for a 50-year-old individual, and $25,000 per year for a family of four.
Inferior retirement plans
When it comes to employer-sponsored retirement plans, the major consideration is the company match — after all, the difference between a 3% match and a 6% match on a $100,000 salary is a pretty significant $3,000 per year. But other considerations matter almost as much, such as investment options and plan expense ratios.
In 2013, the Department of Labor did a sample calculation to demonstrate the impact of plan expenses on the value of retirement accounts, and the results may surprise you. A $25,000 balance earning 7% per year for 35 years would be worth $227,000 on retirement, assuming no additional contributions and a plan expense ratio of 0.5%. That same account with a plan expense ratio of 1.5%, however, would only be worth $163,000 after 35 years, a difference of almost 30%.
Of course, if you're starting your own business, you'll lose company contributions altogether, so funding your retirement becomes an even bigger challenge.
Relocation and cost of living expenses
If your new job is taking you to a new part of the country, your salary increase could easily be eaten up with higher living costs in your new home city.
It's not just the cost of food and housing you need to consider — state and local taxes, licenses and fees, and even commuting and parking costs can significantly impact your standard of living on your new salary.
You can also expect to take a hit on relocation costs: A 2017 survey on relocation reimbursement trends showed that only 42% of employers offered full reimbursement for new hires; transferees fared better at 65%.Obviously, if you're moving on your own to improve your career prospects, you'll need to plan ahead. The typical costs of moving a family are between $25,000 and $75,000, once you factor in buying and selling a home, moving belongings, and paying for temporary housing while you look for a permanent residence.
Corporate culture and dress code
This is an easily overlooked expense, but it can definitely wreck your budget, especially in the first few months after a move. What is the dress code in the new city, company or industry you're moving into? Will you need to upgrade your wardrobe right off the bat?
You may also need to spend more money entertaining potential clients, socializing with associates and networking to market yourself and build professional relationships that will help get your new business or career off the ground.
Financial steps for managing a job change
Making a career change is stressful, even when you're excited about the switch. You can take steps in advance to prepare yourself and your family for the move, to help make the most of your money during the transition.
Pad your savings
The worst thing you can do is raid your retirement account to pay for a career switch, so start socking away savings as soon as you begin thinking of trying something new professionally. Most financial experts recommend building a cushion of at least six to 12 months of living expenses before you make a career change or start a new business. That way, you can be patient and pursue the right opportunity without stressing over how you'll pay your monthly bills.
Calculate your actual living costs
Understand that there will inevitably be some upfront expenses associated with a career change, and that you will need to make some adjustments and tighten your belt at times to make your budget work. You need to have a realistic view of your true cost of living — and where you can and can't make cuts — in order to make the best decisions and know how long your savings will last if you're without income for a period of time.
Pay down high-interest debt
This is good advice at any point in your career, but it's especially important if you're trying to stretch your savings. Getting your personal balance sheet in order is also an essential step if you'll need financing to launch a new business venture. Slash your living expenses and use the extra cash to pay off debt; living lean today will be good practice for later if you need to stretch your funds in the early months of your career switch.
Check your credit report
You need good credit to do just about everything these days, from getting a new job to renting a house or apartment. And if you're planning to finance a new home or a business venture, your credit definitely needs to be in top shape.
It's easy to get a free credit report — many credit card companies offer credit monitoring services and free credit reports to their account holders. You can also get a free credit report from each of the three major credit reporting agencies once each year at AnnualCreditReport.com.
Go over your report and clear up any mistakes or questionable entries. It may take a little time, but it's more than worth the effort to start your new career with a clean credit report.