Most people will experience job changes or even career jobs either by personal choice or due to external factors. There is no more job security and you do not expect to work for the same company your entire working time. Even if you put in a good performance at work, you may still be laid off due to your company closing down.
Always be mentally and financially prepared for a job change. Even if you have full confidence in your performance at work, company stability etc, having the assurance that you can simply afford not to work tomorrow or for a few months temporary will help to keep your options open. For example, you will not be held back because there is an opportunity to start your own business, study full time in a program you have been very interested in, go traveling to exotic locations etc.
The following financial planning tips can help you handle the transition between jobs or career changes, especially when there is a decrease or loss of income:
- Look at your expenses and reduce unnecessary spending when you are earning less than your previous job, or currently unemployed. People tend to spend more than usual after a career change especially when entering a new field of work because of the need to adapt. Be realistic and change your lifestyle according to your new income.
- Always prepare an emergency reserve fund of 6 months expenses or more. This is designed to pay for your daily expenses, insurance premiums, loans and debt obligations etc. Meanwhile, try to get a new job within 6 months or you will be in financial trouble if you need to start borrowing money from lenders for the unemployed. The interest rates are very high and you have no earnings to pay it off, which mean your debts will snowball very fast.
- If you lose your job unexpectedly, make plans to quickly get a new job. Do not tell yourself its a good time to go for a holiday, you can do so after you have made arrangements for new employment opportunities. This is especially important when you are carrying debt obligations such as credit card balances, car loans, mortgage etc. A bad combination of unemployment and high consumer debts can quickly damage your credit score once you start having difficulties with the minimum monthly payments. Your lenders will raise the interest rates on your loans and debts, and things will snowball quickly beyond hope.
- Be prepared to get a temporary job if chances of getting re-employed at your current level of earnings is bleak. Doing some part time work help to bring in some cash to offset your basic expenses, and you should definitely reduce all lifestyle expenditures, especially the use of your credit cards for big purchases you cannot pay in full with cash.
- If you need to relocate for a new job, you need to calculate and compare the cost of living between your existing area and that of the new city. For example, you may need to check out the local prices for housing, property taxes, food, utilities, commuting, and other daily expenses. This will help you decide whether your new job’s income is sufficient to cover your expenses and if any changes in your current financial plan is needed.
- Record your job search expenses because these may qualify for tax savings. Generally, job search expenses for employment opportunities within your current or recent field of work are tax deductible. This may influence the type of work or industry to find a new job, because job search expenses for a new career will not be tax deductible.
Many people are not financially prepared for a job loss or job change. The sudden loss of income, lack of personal savings and unwillingness to reduce lifestyle spending can only mean one thing – that is relying on unemployment loans to get by until you find a job. If you do not have any savings at all, it is better to postpone any major career changes for 6 months while you quickly put together a cash buffer before submitting in your resignation letter. Even with a proper financial plan to cover expenses when unemployed, keep to a frugal lifestyle until you secure the next pay check.