Although I am certainly no expert, I have left a couple jobs over the past few years and learned some tips along the way. Everybody’s situation is different, but below are some considerations if you decide to make a job or career change.
Length of Time with No Income
One of the largest costs when switching jobs is the “cost” of lost income. This may be known or unknown based on your situation.
The first thing to ask is if there is a new job in place. If so, you should know when the new job starts and when the first paycheck will be received - this makes it a little easier to know what the cost will be.
If you do not have a job in place (and no other income sources), it may be worthwhile to do some extra planning. In this instance, I think it is best to determine how long you have until you need to start receiving an income again. This helps you determine when you need to start looking for a new job, how long you have to get trained in a new skill, how long until your new business has to become cash flow positive, etc.
I recommend you start with your burn rate, which I explained in more detail on my last blog. This helps to give you an idea of how much you will be “bleeding cash” each month to determine how long your available savings will last (side note - why are the common spending phrases “burning” and “bleeding”?).
Put yourself in the situation of not having a job - what new expenses will come up now that your employer is no longer covering them? I mention some below but small items may include a gym membership, a cafeteria for lunches, etc. It would be good to have an idea of any other changes that will occur like the cost of moving to a new city, a change in your cost of living, the cost of a big trip, etc. These should be pretty apparent to you and I’d rather use this blog to go into some of the more technical financial planning items to pay attention to.
Health Insurance
Health insurance is an item I overlooked the first time I quit a job. I moved from Philly to AZ with no health insurance! I took 3 weeks off from work and didn’t even put together that my benefits hadn’t started until I received a paycheck. My benefits became available for me about a month after I started, so I basically took an accidental 2-month break from health insurance.
I will point out that this is an item to consider with your burn rate; this expense can be overlooked since oftentimes it is partially or fully subsidized by your employer, and automatically gets deducted from your pay. This may cause you to forget about it since you never saw it while you were employed - but trust me when I say it is definitely an expense!
There are some options to get coverage (the specifics are out of scope for this blog) including:
COBRA
Private Health Insurance
Affordable Care Act
Spouse / significant other
Self-insure (read: no insurance)
Coverage through a cost sharing program (some religions or other groups you are part of may have this)
One other consideration is the period in which benefits actually start. There may be a waiting period before you can use health insurance benefits or dental benefits. If you are going into a new job, some employers may have a certain length of time you have to be employed before you get access to their coverage as well.
There are also a few other benefits that likely will not go with you from the job you are leaving, like disability insurance and life insurance. Or, accounts that are considered “use it or lose it” like a Flexible Spending Account or Dependent Care FSA - when you leave your job you may also be leaving this money with your employer.
Large Events / Contractual Agreements
Remember all that paperwork you signed when you first started the job? Or documents that outlined your benefits, compensation or bonuses with contingencies (like staying employed)? Make sure you go over them again before leaving so that you know what you may be giving up. Here are some that come to mind:
A moving bonus. In a specific example for one of my clients, their company paid them a few thousand dollars to help them move to a new city across the country. According to the agreement, the individual had to stay employed with that company for 3 years, which was not met. When the individual left, they had to pay back $7k. Moral: make sure you know that is coming and are prepared to pay that back. Side note - consider hiring a tax professional to help you handle that correctly 😉.
Another item is an upcoming bonus, stock compensation or a 401(k) that is unvested. If your vesting period is coming up, it may make sense to wait it out a few more months to let these awards or accounts vest. Same with a bonus - if this is expected to be paid out in a couple weeks or months (and there is no claw back), it may make sense to collect this bonus before making the jump.
One last item is to consider your taxes. I would expect for most individuals, you may have had too much taxes withheld for only a partial year of income (since it was assumed you would receive that income for the full year), which may result in a refund come tax time. For others, you may want to consider that your employer is no longer withholding taxes, which may put you on the hook to make estimated tax payments going forward.
Know Your Why
I could ramble on and on in this section but I want to make it very clear that leaving a job is MUCH more than just a financial decision. Leaving a job and starting something new is super emotional, but finances have a big impact on your emotions.
The emotional toll from taking a risk of leaving a job is enough by itself. Having an idea around your finances can at least ease some of that stress by knowing how long you can go without an income if needed.
It may also be helpful to write down why you are making this change, especially if it has a big impact on your finances. For me personally, I left a good paying job with all the benefits to start a business. There are certainly days I question why I am working so hard for less money… but then I remember my “why” was to build something that brings me more fulfillment - the money will take care of itself as long as I continue to build my business in the right way. When I get a little remorse from such a big decision, it brings me happiness to remind myself why I made this change and what I am trying to accomplish.
Additionally, determining your why may make your current job a bit more bearable as you make a plan around leaving it. Knowing that you are working towards a change and the goals you need to hit may help you feel more inspired to continue working hard until you leave the position.
These goals you are working towards can help to ensure your future business can survive, or your next career move can be accomplished!