A 10-Step Guide to Saving and Investing for a Career Change

If your current job stinks or you feel ready to test your chops in another industry, you likely know that pulling off a successful career change requires more than a leap of faith. 

Changing to a new sector or starting a business is essentially an identity shift. In the months leading up to your two-weeks notice—and for several months after—get ready to reevaluate all your habits, financial goals, and money decisions. It may feel overwhelming at first, but that’s just the reality of designing a future that looks radically different from your life today.

The good news is you’ll adjust. And a lot of good can come from switching the trajectory of your career. Millennials should know; we kind of invented job hopping. Expect an adjustment period, but if you plan your money right, you can help ensure that your career change leads to more opportunity and personal satisfaction overall.

Here are 10 steps to saving and investing your money when a big career switch-a-roo is on your horizon.

This sort of goes without saying, but you really should take a big pause and prepare yourself for changes.

We humans are funny. As much as we say we want change, it’s still a total, full-body adjustment to the nervous system—and that can be hard. Start to think about what you need to feel supported. What are the non-negotiables in your life, and which items in your budget can hit the road as you re-prioritize? Also talk to your friends and family to make sure they are on board with how your career hop is going to change your availability, energy levels, and focus for at least a little while.

Do you know your current savings rate today? If not, it’s easy to calculate. Divide the total amount of money you put into savings and investments every month by the money you’ve got flowing in. For instance, if you bring home $5,000 worth of bacon each month and save $1,000, your savings rate is $1,000 / $5,000 = .2, or 20%. 

Before you switch careers, you should bump up your savings rate—especially if your career switch is going to involve a period of sabbatical or job-hunting, or if you plan to start a business and expect inconsistent revenue at first. 

Take advantage of the steady dough from your current job, cut down on takeout and nights out at bougie restaurants. We promise this phase won’t last forever, and you’ll be glad you thought ahead to what kind of safety net your future self might need to confidently navigate uncertainty.

Normally, experts recommend having at least six months’ worth of savings put aside, but since you’re upping your risk factor by going off into the great unknown, it’s probably best that you have about a year’s worth tucked away for a rainy day. 

Now—a year’s savings may or may not feel impossible to you, so ask yourself how much you truly need for the level of risk you’re about to take on. If you’re switching over to a more lucrative salaried job, well then kudos; you might not need a year of money stashed aside. However, if you’re leaving your gig for entrepreneurship, or if you have higher living costs due to kiddos, medical expenses, or big student loan payments, make sure you won’t be scrambling.

A major benefit of having a healthy emergency fund is that you won’t feel desperate no matter where your job search leads you. Having the confidence to say “no” to misaligned opportunities will help you make the most clear-headed decisions. It’ll also keep you from panicking if the water heater breaks or your dog needs to take a trip to the emergency vet.

Which is why your emergency fund should be accessible. As a rule of thumb, don’t invest any money you’ll need within the next two years. Keep emergency fund money in a free savings account where it will earn at least enough interest to combat inflation. Most online banks have a high-yield savings account option that you can link to your checking in a few clicks should you need the funds. Varo Bank, for instance, offers a free online savings account that starts at a 0.20% interest rate, and then earns up to 3.00% APY when you meet certain monthly requirements.

When you’re making career moves, monthly cash flow is a big part of your decision. But what if you could replace a portion of your monthly salary with passive income and remove some internal pressure? Imagine choosing your next career move out of (dare we say) passion—or even love? Generating passive income through alternative means can allow you to sit back and wait for the perfect opportunities to come to you, not the other way around.

But don’t worry, you go getter, you: Passive income isn’t boring by any means. You’ll have plenty of options to satisfy your intellect. Invest in stocks that pay dividends, or look to get your jollies with dividend-paying REITs. With the platform Fundrise, for instance, you can get paid frequent dividends and earn returns ranging from 9% to 12% from property appreciation. 

Before you change jobs, update the email address and contact information listed for your company’s 401(k). That way, your investment manager can find you when it’s time to discuss options for rolling over your retirement account.

This step is where things get tax-y. As you might know, withdrawing from your 401(k) into a personal checking or savings account before age 59 ½ is going to hit you with early withdrawal fees. The early withdrawal penalty from the IRS is around 10% of the total amount you have in your retirement savings. You’ll also have to pay full taxes on that money, adding the full amount to your year’s taxable income.

Therefore, you should roll your 401(k) into a qualifying retirement account such as an IRA. Due to the tax structure, rolling over your 401(k) into a Roth IRA can be a good idea if you expect your income to be low for a while.

Did we mention you’ll be taxed extra if you cash out your 401(k)? Well it’s worse than that.

The big kicker is this: Using your retirement accounts means you’ll miss out on compound interest. If your retirement accounts are worth, say, $30,000, you’d drain that amount from your net worth, plus the missed years of potential interest you would no longer be able to earn.

If you plan on going back to school or getting an advanced degree of some kind, plan ahead by opening a college savings plan. A little-known fact is that 529 plans aren’t just for kids. Adults can open them for themselves, too. There’s also a number of alternative investments for college savings that could work for you, depending on your time horizon.

If you need additional money to start a business or fund a career change, look to assets you can afford to liquidate without sacrificing your retirement savings. For instance, if you and your partner have a two-car household but mostly work from home now, consider selling the second car. You can also list items for sale online or consign fancier stuff you don’t want anymore. And if you’ve traditionally had “fun money” set aside for alternative investments like crypto, maybe now’s the time to hit “pause” and use that cash for your immediate future.

And speaking of cryptocurrency, you could sell some coin if you were lucky enough to buy Bitcoin or alt coins before they jumped in value. Keep in mind that selling crypto holdings for a profit will result in capital gains taxes. The standard capital gains tax works out to about 15% if you’ve owned the currency for over a year and make more than $80,000. If you’re selling crypto you’ve had for less than a year, prepare to pay short-term capital gains tax (equivalent to your normal tax bracket rate) on any profit.

When’s the last time you calculated how much you’ll need in retirement, or what percentage of your income you’ll need to put aside to get there? Given that your money situation is about to change, take time to consider whether you’re still on track for the life you want in your golden years. Consider factors like current and future medical costs, whether your house(s) will be paid off by retirement age, and where you want to live. 

If you’re starting a business, do you plan to sell the asset one day to fund your retirement? Or perhaps you want to open a SEP IRA, Simple IRA, or Solo 401(k) if you plan on becoming self-employed.

Think broadly for a moment. When you’re in the thick of any job search, it’s easy to hone in and laser-focus on finding the next step in your career. But sometimes, keeping the blinders on can come at great cost. It’s one thing to look for a job that will more comfortably pay your bills, or even one that will afford you an upgrade to that champagne lifestyle. But don’t get sucked into what can be a never-ending domino effect of looking for one job to improve your life, then the next and the next and the next. 

Instead, why not take a little extra time to aim bigger, towards a little something die-hard money nerds like to call financial independence? 

Achieving financial independence means having the flexibility to work and make income on your terms. Calculate your lifestyle costs for today, then project them to what they may be five years from now, ten years from now, and so on. 

Then, figure out how long you want to work—for the rest of your life? for the next ten years? Until you have kids, or until your kids graduate?

Based on your projections, calculate your “FI number” (financial independence number). This is whatever amount of liquid savings and assets would give you financial peace of mind and the flexibility to pay for your lifestyle without being so dependent on working time-intensive jobs. 

At first, imagining this level of financial freedom may feel a little taboo or even impractical—but working towards financial independence is certainly not going to hurt anything and will likely keep you more motivated throughout your life.