The Big Switch
Managing a budget for your average day-to-day life can be challenging by itself — no matter what plan you use. But it can be especially difficult to adjust your spending for a big change like merging finances with your partner or having a baby.
One type of budget disruption that many people don’t prepare for? A career change. Whether you’re getting a promotion that comes with a big raise, moving to a new company, going back to school, or switching careers entirely, your finances are about to get a shake-up. Here are six ways to help keep your plan on track — including where to cut back if your income goes down and where to spend if you get a raise.
Take a Bird’s-Eye View
Before you even decide whether to accept a new position, switch jobs, or change careers, sit down and look at how your new income (or lack thereof, if you’re thinking about going back to school) would affect your budget.
Don’t just focus on the dollar amount: You should also consider health care for you and your family, 401(k) benefits, paid time off, child care, and any other benefits that could be part of your compensation package. You’ll have to adjust your budget accordingly if, for example, you’ll make more money as a contract worker but won’t get a 401(k) with a match, health care, or paid time off.
Remember to consider new costs that could affect your new income, like transportation, a new wardrobe, etc., even if you’re getting a big raise — and factor those into the equation.
Negotiate, Negotiate, Negotiate
No matter what change you’re making, do what you can to walk away with the highest income possible. If you’re taking a new job or being promoted, do your research on what salary the position garners in the marketplace. Glassdoor and Indeed are good resources to use to make sure you’re being compensated competitively.
If you’re offered a raise you didn’t ask for, don’t assume what you’re being offered is all that’s on the table. Make a case for why you deserve more money (just make sure you can back it up with examples of work you’ve done and value you’ve brought to your company). And if you’re offered financial aid for a new degree, ask for more. Many people are surprised to learn this is an option, but schools want your enrollment, and you have the power to walk away if you can’t afford it.
Modify Your Spending and Savings Plans
Once you have an idea of what you’ll be making, reconsider your spending plan. If you’ll be making more money, it’s important to think about how that money will be spent (we’ll discuss lifestyle inflation later). What are your priorities? What will change?
If you will be making less money, take a look at where you can adjust your budget. In general, it’s a good idea to continue saving for retirement and short- to medium-term goals. Cut back on spending that isn’t essential. Maybe you’re used to getting a new iPhone every time the latest model comes out? If your paycheck goes down, you can probably cut this.
Plan for Income Gaps
If you will have an income gap from time off between jobs or becoming a student, first calculate your essential expenses. Include anything you or your family really can’t do without: rent or mortgage payments, utilities, groceries, transportation, childcare, etc. Then consider which nonessential expenses (like dinners out and birthday gifts) you also want to budget for. This will give you a realistic picture of how much money you’ll need.
If you have advance warning before your income goes on freeze, you may want to put money into a savings account to cover this period. This could mean putting the big change on hold while you save the money, or it could mean taking on some work on the side to accelerate your savings. And if you’re going back to school, look into student loans that cover living expenses as well as tuition.
Beware of Lifestyle Inflation
If you’re getting a raise, it can be easy to view it as a windfall. Of course, it is a good thing, but it’s easy for this money to disappear due to lifestyle inflation: deciding to splurge on dinners out, new clothes, a fancier cable package, and so on.
While you certainly can make an upgrade here and there, make sure this type of lifestyle inflation doesn’t cancel out the extra income. Decide ahead of time where you want the additional money to go so you won’t find yourself scratching your head when the time rolls around to balance your budget.
If you want to avoid lifestyle inflation altogether, you can increase your 401(k) contributions or other automatic savings to reflect your new pay bump and continue spending just as you were. You won’t even notice the change, but your savings account (and future self) will thank you.
Factor in Education for the Future
Going back to school? If so, think about how you’ll finance it. You may be able to continue working and even get some of your educational costs paid for by your employer. But in many cases, you’ll need to take some time out from the workforce while you study. Either way, just explore your options — including financing like loans and grants and unconventional ways to pay off student loans — and talk to people who have been there. They can help guide your thinking around whether more school really will propel your career forward.
In order to plan for life after graduation, crunch some numbers and estimate your monthly student loan payment. For example, using a calculator like this one from DinkyTown, imagine you’re taking on $20,000 in student loan debt at a 6.8 percent interest rate (the current rate for Federal Plus loans). This would result in a monthly payment of $230 over 10 years (the standard repayment period for federal loans). Think about what you expect to earn with your new education and figure out whether it will cover the costs of taking on this debt. With enough information, you can plan ahead when it comes to budgeting for education as needed.
Before joining the Society of Grownups, Karen Carr completed a BS in finance, obtained her CFP®, and went on to work as an advisor at a boutique, private wealth management firm.
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