Accepting a new career opportunity can be an exciting and rewarding experience, but it can also bring changes to finances. With a potentially new paycheck, company benefits, and insurance policies to coordinate, it's important to stay organized for a smoother transition. Here are some helpful tips for managing finances after a career change.
When switching jobs, it can be beneficial to reassess financial priorities as you prepare for the transition. If there was a gap between jobs, rebuilding an emergency fund could be a top priority. Once a steady paycheck resumes, it can then be easier to resume working toward saving goals, even in small amounts. Transitioning into a new job can also be a good time to:
With these considerations in mind, a solid financial foundation can be rebuilt after a career change and help realign financial priorities for the road ahead.
A fresh start in a career is a great time to make smart choices from the get-go and create a solid budget that aligns with new income, benefits, and financial goals, helping to boost long-term financial stability and success. There is also an opportunity to reorient yourself financially by updating your budget, finding savings opportunities, and making sure future goals are still on track.
Find out what the pay period is for the new job, in case it differs from the previous company. For most organizations, employees can expect a bi-monthly paycheck. To manage finances effectively between pay periods and increase savings, a budget is essential. One popular method is the 50/30/20 rule. Fifty percent of the paycheck is allocated for necessities such as rent or mortgage, groceries, utilities, and other regular expenses. Thirty percent is set aside for discretionary spending, including entertainment, dining out, and travel.
The remaining 20% should be allocated toward personal savings and financial goals, such as paying down debt, building an emergency fund, and contributing to retirement. If the frequency of paychecks increases to weekly, it may be necessary to adjust the budget to distribute bill payments more evenly throughout the month, as income will be coming in more regularly.
When building a budget around a new income, take time to review the first few paychecks to understand payroll deductions. While mandatory deductions, such as federal and state income tax, are typically fixed, it's essential to audit other pre-tax deductions, like monthly benefit premiums and 401(k) contributions, to ensure they match the enrolled benefits programs.
The net pay—what remains after payroll deductions—should be used to determine how much can be allocated to each area of the budget. Even with a higher paycheck, day-to-day expenses don't necessarily need to change if it’s not necessary to do so. Instead, this could provide an opportunity to put more toward savings, reduce debt, or contribute more to retirement account(s) for the future.
Each step in a career can contribute to a financially secure retirement, and transitioning into a new role often reveals new opportunities to save for the future. It's important to proactively explore the new benefits package to maximize savings potential. For example, if the new compensation package includes a higher employer match on a 401(k), it’s crucial to ensure personal contributions are sufficient to be eligible for the full employer portion.
Additionally, if stock ownership options are available, active enrollment may be necessary to take advantage of the program. After putting in the effort to build retirement savings, it can be essential to maintain that momentum by reviewing existing retirement accounts and determining how best to move forward with the new options.
If a 401(k) is held with a previous employer, there are several options depending on personal goals. The account can be left where it is, with no further contributions; rolled over into the new employer’s 401(k); cashed out as a lump sum distribution; or rolled into a traditional or Roth IRA outside the new employer’s plan. It may be beneficial to consult with a financial professional to determine the best course of action, considering factors such as the current account balance, tax implications, withdrawal fees, and other available savings options.
When a 401(k) is left with a previous employer, the funds will continue to be managed and grow according to the selected investment options, but no further contributions can be made. If the account balance is less than $5,000, the former employer may require the funds to be moved into an IRA. If you choose to leave the account with the previous employer, it is important to stay informed about the account's status and ensure that contact information with the plan sponsor is kept up to date.
For those who prefer to keep assets in one place, rolling over a 401(k) to a new employer is typically an option, but it is not mandatory. However, accounts held with a previous employer may incur monthly processing fees, as the individual is no longer part of the company’s group plan.
Verifying the costs associated with maintaining an old 401(k) may impact the decision to consolidate savings. A direct 401(k) rollover could be arranged, transferring funds from the previous employer’s plan to the new one without incurring taxes or penalties. It’s wise to check with the new company’s plan administrator to confirm whether rollovers are allowed and to understand the required steps.
Along with changes in paycheck and retirement benefits, a new job may come with a compensation package that includes new coverage policies, flexible or health spending accounts, paid time off, bonuses and commissions, childcare assistance, student loan repayment, and tuition reimbursement. Be sure to carefully review all benefit information to understand which benefits require employee enrollment and if there are any eligibility waiting periods.
For example, company-sponsored short-term and long-term disability coverage may require up to a year of service before it becomes available. Being aware of these waiting periods and exploring additional coverage options can help ensure income and health are fully protected during the first year of employment until eligibility is reached.
Eligibility for benefit programs at a new company can begin anywhere from the first day to the ninetieth day of employment. Take time to review when coverage will start and check the onboarding packet for enrollment deadlines. Enrollment decisions typically need to be made within the first month of employment, and if the deadline is missed, the opportunity to elect coverage may be postponed until the next annual open enrollment period.
Creating a budget and planning for the next stage of a career involves understanding when coverage begins, what is covered, and the associated costs. In looking at employer-provided life insurance, for example, review if the coverage amount provided through the new employer is the same as previously and if you need to find supplemental coverage. Taking a comprehensive look at all your benefits can help ensure financial stability and allows for better decision-making regarding benefits and expenses.
Starting a new chapter in your professional life can be an exciting time, bringing new challenges and experiences. A job change also offers an excellent opportunity to meet with a financial professional to review and adjust a financial plan, fine-tune a budget, update goals and timelines, and explore ways to save more for the future. It can also be helpful to explore the ways life insurance and annuities can help supplement the benefits that come with a new job and add more financial security and stability to your life. Proper planning during this transition can help minimize financial challenges, maximize opportunities, and make the most of this important milestone.
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