How to Prepare Financially When Switching Jobs

It’s not uncommon to switch jobs, especially in the wake of the “Great Resignation.” For many, a lengthy job search can yield a worthwhile job opportunity. But finding a new job is just the beginning. As you navigate the change, you’ll need to carefully consider the impacts on your finances. Let’s explore how to prepare your financial situation for a job switch.

How a Job Switch Can Impact Your Finances

While a job comes with a paycheck, switching jobs isn’t always about the money. Sometimes, a change of pace or a pivot to a new field is the goal. Either way, the change might impact your finances.

Short-term Cash Crunch

When you make the switch from one job to another, the payday cycles might not line up. If you are living paycheck to paycheck, this switch could lead to a short-term cash crunch.

Beyond a change to your payday, you might run into upfront costs associated with your new job. For example, you might need to buy specific work attire or a parking pass as a part of your new job experience. Although these startup costs might be unavoidable, they can take a toll on your cash flow.

Long-term Financial Benefits

While there are many reasons to find a new job, many choose to make a change that comes with a bigger paycheck. Others might choose a new job with less tangible benefits, like lower stress or an opportunity to build their skills. According to a LinkedIn survey, 45% of people leaving their jobs were concerned with the lack of advancement opportunities, while 34% were unsatisfied with the compensation.

If you are switching jobs for personal reasons, the long-term benefits might include lower stress and better health.

If you are switching jobs to earn more money, your financial picture may change for the better. When making the switch to a higher-paying job, you have a great opportunity to build a brighter financial future.

How to Protect Your Finances While Switching Jobs

As you make the switch to a new job, it can be a bumpy time for your finances. Even if you are transitioning to a higher-paying job, you may encounter bumps in the road. Luckily, it’s possible to create a smoother transition by making some thoughtful financial decisions in the lead-up to your transition. Here’s a closer look at the steps you can take to protect your finances.

Beef Up Your Emergency Fund

An emergency fund is a key part of any stable financial situation. When life throws unexpected events and expenses your way, an emergency fund can help you stay afloat. If you are changing jobs, an emergency fund is a useful tool for a smooth transition.

Many experts recommend keeping three to six months’ worth of expenses in an emergency fund. As you embark on your job hunt, consider making your emergency fund a priority. If possible, build up your emergency fund in the months leading up to your transition. Hopefully, you won’t need to fall back on the funds. But if you have unexpected expenses related to your new job, or if you are unemployed for some time before landing a new job, the emergency fund can help you cushion the blow.

Not sure how to boost your emergency fund? Consider temporarily cutting back on discretionary purchases. For example, you might cut out takeout or dining out until you’ve hit your emergency fund goals. Another option is to look for ways to increase your income. Temporary ways to increase your income include picking up a side hustle, like delivering groceries or transporting passengers around town.

Don’t be afraid to get creative when building your emergency fund. Remember that nothing is permanent. If you decide to slash spending, you don’t have to keep up the sacrifice forever.

Consider Moving Costs

A new job might require a move to a new home. Whether you are moving across town or across the country, moving costs can add up quickly. According to Forbes, the average cost of a move is $1,400. However, the costs can range from $2,200 to $5,700 for a long-distance move.

When considering your new job prospects, keep moving costs in mind. Before taking the leap, estimate moving costs with a handy calculator. The rough estimate can help you keep the budget for this potentially major expense.

Before accepting a job with a high moving cost, consider asking your future employer about a relocation stipend. Some companies will offer to cover moving costs or give you a certain amount of money intended to subsidize your moving costs.

Evaluate Your Basic Expenses

While jobs offer other benefits, a key purpose is to obtain a paycheck to cover your expenses. When making the transition, take a hard look at your basic expenses.

A few of the basic expenses we all have include housing costs, transportation costs, and food costs. Depending on your situation, your outstanding debts might be another component of your everyday expenses. If you have several debts, like credit card balances or student loans, the minimum monthly payments could amount to hundreds or thousands of dollars each month.

Take a minute to tally up your necessary expenses. Based on your costs, come up with an ideal salary for your situation. For example, if you have $2,000 in monthly debt payments, you’ll likely need a higher-paying job than someone who is debt-free.

As you look for other jobs, consider the reality of your financial situation. It might be tempting to transition into an entirely new field or a position with more flexibility. But it’s critical to keep your monthly expenses in mind. If you have extensive debt or high expenses, you might not have the financial luxury to accept a lower-paying job.

Of course, it’s possible to make a change to your financial position. For example, you might decide to stick it out at a higher-paying job while making significant progress on your debt repayment. You might even set the goal of transitioning to a job that better suits your life after eliminating some of your monthly debt costs.

A financial reality check can help you find a job that pays the bills.

Ask About Unused Paid time off (PTO)

For employees lucky enough to have vacation days banked at their current job, don’t leave these paid days off behind. If you don’t have the time to use the days for a vacation, ask about your employer’s policy on paying out the days. In some cases, employers will pay out a lump sum of cash equal to your vacation days.

If you have a significant number of vacation days stored up, your unused PTO could provide a nice windfall. Consider using these funds to boost your emergency fund or cover expenses related to your new job. If you’ve already topped off your emergency fund, consider using the windfall to meet another financial goal, like paying off credit card debt or saving for retirement.

It never hurts to ask about your unused PTO. Hopefully, you’ll be compensated for any unused PTO. if you aren’t compensated, at least you’ll know you didn’t leave anything on the table.

Be Prepared to Repay Extra Compensation

Before giving your notice to a company, review your contract. In some cases, you might have to repay extra compensation given along the way. For example, many companies will require you to repay a sign-on bonus or relocation bonus if you don’t stay at the company long enough.

The only way to know the details of your unique situation is to read the fine print of your contract. You may need to stay at the company for a set period of time to avoid any repayment obligations. For example, you might need to stay with the company for at least one year to avoid repaying a sign-on bonus.

If you are required to repay extra compensation, determine how that will factor into your budget. Depending on the repayment required, your savings might take a significant hit. In some cases, it might be worth sticking it out at your current job until the repayment obligations have passed. After that, you’ll be free to take another job without the hassle of repaying a sign-on bonus.

Take Care of Your Retirement Accounts

Unfortunately, it’s common to accidentally leave your hard-earned retirement savings behind when switching jobs. According to a study from Capitalize, an estimated 24.3 million forgotten 401(k)s hold approximately $1.35 trillion in assets. Each year, an estimated $2.8 million in retirement savings are left behind.

The financial repercussions of leaving a 401(k) behind can be dramatic. Capitalize estimates that leaving a 401(k) behind can cost the individual up to $700,000 in forgone retirement savings. Depending on your situation, leaving your 401(k) behind could lead to a delayed retirement or a lower standard of living.

If you have retirement accounts through your current company, it’s critical to take care of these details. First and foremost, make sure to save your login information to any employer-related retirement accounts. You don’t want to accidentally get locked out of your retirement savings.

The log-in information ensures that you’ll have access to make rollovers or withdrawals after leaving your position.

Adjust Your Budget

A new salary comes with the need for a new budget.

If you are taking a pay cut, you’ll need to determine how this change will impact your budget. For example, you might need to find more affordable housing or transportation solutions. Comb through your expenses to see where you can cut back when bringing home a smaller paycheck.

If you’ve scored a bigger paycheck, you have different decisions to make. Although it might be tempting to spend through your new paycheck in the form of an upgraded lifestyle, that’s often not the best move for your finances. Instead, you might want to use your bigger paycheck to reach the financial goals that you’ve been putting off.

For example, you might funnel the extra funds toward your credit card debt or build up a down payment for your first home purchase. Of course, treating yourself with your new paycheck isn’t always a bad thing. But it’s smart to strike a balance between lifestyle upgrades and long-term financial goals.

Negotiate Before Accepting an Offer

When making a job switch, it’s a good time to negotiate for better compensation. While it’s tempting to avoid the uncomfortable conversation, negotiating can put you in a better financial position for years to come.

According to a study by Fidelity, 58% of Americans accepted a company’s first offer without any negotiation. But when a job seeker negotiates, they are successful 85% of the time. And you don’t have to stick to salary negotiations. You can negotiate for better perks like an employer match to your retirement savings, expanded health insurance, or a cost-of-living adjustment built into your contract.

Never be afraid to negotiate. If you are currently holding down a job, that gives you more power at the negotiation table. Even if you don’t have a job at the moment, asking for a better compensation package can pay off.

The Bottom Line

A change to your employment situation will have an impact on your finances. With some preparation, you can set yourself up for smooth sailing. If you are planning to make a change to your employment situation, consider laying the financial foundation as soon as possible.