How can I plan for and manage my financial affairs during potential career transitions or changes?

Planning is the operative word in the question. We speak with many clients who aspire to make a change, but are blinded by some key aspects that could potentially provide a negative experience. Here are some key considerations to contemplate before deciding on what can be a very rewarding decision, both financially and career wise, if done the right way:

1. Assess your financial situation: I know it sounds obvious, but it is the logical first step. The best decision is an informed decision. You know there will be an interruption to your income (whether it is yours, or your family’s) which may place you or your family in a challenging position to meet any financial commitments you have set in place, such as loans and leases.
2. Create a budget: You will need funds set aside to carry you through the interruption in your income earning ability. You will need to assess your ability to save and accumulate a “buffer” which should in turn provide a guide on the timing you can make a decision. Having a budget in place is best practice, whether you are considering a potential career transition or change, or not. It is the foundation step for any wealth accumulation plan. You will not regret this step, but many skip over it! Skipping this step would be unwise 😉.
3. Build an emergency fund and calculate the financial impact: The budget mentioned above is the how, but the amount you need to build is the why. This will be dictated by the amount of time you will be out of work or earning a lower income. You will also need to decide what level of lifestyle you wish to maintain, or not (refer to step 2). For example, if you are earning $80,000 per annum net of tax and you plan to be out of work, or building a business (refer to step 4) for 2 years, you will need at least $160,000 to replenish your cashflow, but you will likely also incur other expenses, such as study costs or set up costs (if you choose to build a business). I should note that 2 years is an optimistic timeframe for a career change or building a business, so the likely emergency fund could be in the +$250,000 range. It is probably important to note that the emergency fund could be held in a mortgage offset account which should provide other financial benefits to you over time.
4. Evaluate your career options: Doing thorough research on what level of income you could earn and over what timeframe is an important consideration. Make no mistake, the transition will be challenging and establishing your “why” will help you push through the tough times. Often when making a career change, entry level positions will be far less than what you were earning in your prior career, despite your “life experience.” The other option we often discuss is establishing a business with the skillset you already have, but without the security of an employer to pay your wages. This can be an alluring direction but does require an honest self-assessment of if you have the requisite business management skills, in addition to the core technical skills, to be successful. Further, if you are taking on that risk, you really should be looking to earn “super profits” from what you were earning as an employee. Again, the timeframe to get back up and operating from your prior career earning position will determine the amount at step 3.
5. Review insurance coverage: You may have an income protection policy in place and not working may jeopardise the policy. Check if you have an indemnity or agreed policy as this will also impact any coverage while you are transitioning. It is important to remember that if your life cover is held in superannuation, your employer may no longer be contributing to cover the cost of the premium. You may need to review how the premiums will be paid and assess the impact on the longevity of your superannuation. Consider any polices that are provide as part of your employment and speak to a professional to see if the coverage can be maintained in a personal capacity. In short, make informed decisions, rather than letting decisions be made for you.
6. Manage debt: Consider speaking to your lender and ascertain if you are able to change your loan repayments to interest only, from principal and interest. This may assist with cashflow. You will need to provide a timeframe of your plan to increase the probability of success. Review and analyse your credit card limits – you may wish to reduce the limits to reduce the likelihood of living beyond your means in the transition phase and incurring large interest costs.
7. Explore additional income streams: Any income is good income. If you are studying, you may the flexibility to consider part-time casual work to provide you with a level of financial stability and consistency. Equally, if you are planning to start a business, you may wish to “straddle” your employment with less hours/days to provide a level of income while you build your own business. It can be challenging to make the “jump” away from paid employment, but the leap will eventually need to be made and will provide you with the hunger to build and generate your own income.
8. Plan for retirement: the change you are considering should be to provide you with a more comfortable lifestyle in the future, or to provide you with more flexibility. What will you do with the additional savings you are able to generate from your new career? Some clients also make a change in career to allow them to be more educated about their own retirement. We tend to use the word “financial independence” rather than the traditional retirement – which could also mean that any career change may extend your working life due to work satisfaction, or that it is less challenging on your body or mind.
9. Seek professional advice: making the decision to change careers requires you to consider all of the above points. An experienced financial adviser will be able to share stories of success, and failure with you, to place you in the best position to make an informed choice. You may also seek advice from an accountant if you are considering setting up a business as they should be able to provide you with guidance on the best structure based on your detailed business plan and growth projections.

All of the above points rely on you having a clear understanding of your current financial position. We lead busy lives and being financially organised rarely receives the priority it should. This can lead to stress, stemming from worrying about something that may not be a concern. Equally your gut may be right, and you should be concerned, but you are unable to move forward due to not knowing where you are!

The benefit of knowing your financial position (whether it be strong, average or weak) should allow you to make informed decisions about whether you should consider a career change.