Are you contemplating a career change? Having gone through a career change myself, I know how difficult it is to strip off your old identity and try to build a new one. Now on the other side, I can truly say that it is one of the most anxiety-inducing but liberating experiences I’ve had.
As a financial planner and a trailing spouse, I naturally meet with a lot of people who are in the process of looking for a new direction. One common theme I discovered is that many people only know that they are unhappy about their current job situation, but don’t exactly know how to find a way out.
Short of being a career coach, I can’t really tell you how to find your calling or how to release your potential. However, through experience I created a framework that may help you determine what your new direction should be and whether to make the leap from a financial perspective.
I believe that career change is one of the most important financial decisions you can make. Like I’ve said many times, all life decisions have financial consequences, never mind the one that determines your income for years to come. While you may have thought about all possible scenarios from A to Z, I think it’ll be useful to put those scenarios into this framework to give you some perspective.
I call this framework the “Happy Equilibrium.” The equilibrium is the intersection of your answers to the following questions:
What are your missions?
A mission is what makes you feel a sense of purpose. It’s something you are contributing to this world for the benefit of OTHERS. I sincerely believe that we cannot be happy until we find our role in making this world a better place.
Your mission doesn’t have to be a conventional profession. Being a full-time parent or caregiver of a loved one can also be your mission, if you truly feel that’s your calling. And note that I used plural. You can define as many missions as you like – being a parent is one, being a public servant another.
Before I discovered the profession of financial planning, I always had this feeling that I hadn’t found my calling. There were many things that interested me, or that I’m good at, but I couldn’t identify with them fully. Financial planning was the first profession that grounded me, that gave me purpose.
Your mission should be broad enough that it’s not confined to any one small definition of a career. For example, now I consider financial planning a calling, but my mission is to help couples work together as a team on their finances. Whether I do it as a financial planner or a marriage counselor is not important. I simply want to have the training and expertise to help people this way. So my profession may change, but my mission doesn’t.
The broad definition of mission also gives you the flexibility to look at different possibilities of career change that you may not have thought of before. If your mission is to bring out justice in this world, you can be a lawyer, a human rights activist, a filmmaker, or a journalist. This flexibility helps you find the happy equilibrium with the other two aspects of your life.
Of course, your mission may also evolve as you learn and grow. It may help you embark on another career change when that happens. If you’ve struggled to pick a mission, working with a coach may help. Sometimes you just need to start somewhere so you know whether it’s right for you.
What is important to you?
Humans are born selfish. While our missions are important, we can’t be altruistic all the time. Being able to live in a way that exhibits who we are is what makes us unique. Our preferences matter to our happiness.
They can be down to the small things, such as needing to sleep 8 hours a day, or having access to quality coffee. Or it can be a commitment such as not separating from your spouse for longer than two weeks no matter what.
The point is that everyone’s preferences are different. Even you and your spouse’s preferences will be. When looking for a career change, it’s important to take these seemingly inconsequential preferences into account instead of setting them aside. People may even laugh at you for your quirks, but it’s none of their business. You alone can decide what preferences are truly important to you.
Of course, if you have way too many preferences, it might be difficult to find a job or profession that works for you. Therefore it’s crucial to know yourself well and pick the preferences that are worth the fight. You may start with many but just pick three. When you consider a new profession that matches your mission, it should also match your top 3 preferences.
For example, if you know you can’t function without a regular sleep schedule, you probably don’t want to become a nurse that needs to work night shifts. If you have decided nursing is your calling, seek early on to develop a specialty that allows you to not work irregular shifts.
What do you need to take care of yourself and your family?
Financial necessity may be one of the biggest hurdles that stops people from taking the leap. I was fortunate enough that when I made my career change, money wasn’t an issue for us. We started living on one income immediately after getting married, so all my future income is a welcome addition.
You may not be so lucky, being the current sole breadwinner or needing dual income to get by. I don’t want to minimize the importance of making ends meet. However, you shouldn’t jump to conclusions without actually doing the calculations.
Before thinking about what is needed for the transition into a new career, assess objectively what income you need to survive, now and into the future. Assuming you are successful with the career change, will the new income level support you and your family for the long run?
This may require more research than you think. It’s easy to guess what a lucrative career certain professionals have, but you need more proof. Check out Glassdoor or Payscale to get a rough idea of the pay range. Study the industry trend on whether the profession is on the rise or decline.
In the meantime, you should also have a good understanding of your spending habits. You may spend a certain amount right now, but is it really what you need to spend? Are you willing to change your lifestyle to expand the opportunity of finding the happy equilibrium?
Changing your lifestyle may range from cutting your club membership to moving across country or overseas. Estimate these numbers so you know the minimum income level you’ll need after the career switch. If it’s still a possibility, then we can move on to actually prepare financially for career change.
How to prepare financially for career change
Finding the balance between fulfilling our purpose, living our preferences, and meeting the financial needs of our family is the Holy Grail. If you do find something that you may be able to pursue, how do you prepare yourself financially to make the change? Here are the three steps to follow:
#1: Establish a baseline
You might have calculated an estimate of how much income you need to survive when you were evaluating different career change options. Now it’s time to get serious and commit to a line item budget.
What you want to do is establish a baseline of what your family needs to live on for a year. An annual budget is important because many of our expenses are not recurring monthly, but yearly. Make sure you account for all the spending that is necessary throughout the year. Below are three areas of focus to help you do that:
Fixed versus Discretionary
Before you look at the discretionary expenses, such as food and entertainment, list all the fixed expenses that you have to pay. These usually include mortgage / rent, utilities, car related payments, childcare or school expense, insurance, and phone / Internet bill. You may also have existing debt like student loans or credit card payments.
While it’s possible to reduce expenses in these categories, it’s unlikely you can completely eliminate them without making drastic lifestyle changes. Write down what you are spending now in these categories first.
After you know how much you have in fixed expenses, move on to the things you can control day to day. You may be able to give yourself a daily or weekly food budget, monthly entertainment budget, and annual travel budget. Make sure you account for recurring payments you have now such as a gym membership or Amazon subscriptions.
Once you have these two large categories, you will have established the minimum you need to live on. The number seems high? Go back line by line to see whether there is room for reduction, but don’t get hung up on the dollars and cents. If the math doesn’t work, you may want to think about whether the career change is also worth the lifestyle change.
Need versus want
One of the challenges of establishing a baseline is confusing what you are currently spending with what you need. That’s why separating out fixed from discretionary expenses is helpful as a first step. Fixed expenses are generally needs, and discretionary expenses are a combination of wants and needs.
In order to make career change happen, you may choose to make certain sacrifices such as decreasing your “want” expenses. For the frugal it may be easy to do, but not everyone naturally operates this way.
If your discretionary expenses seem high, go through last month’s bank or credit card statement. Mark each purchase as need versus want. Once you add up all of your “want” purchases, you can decide whether it’s worth it to cut them out to make career transition possible.
Now versus Later
When you calculate your budget for the long run, make sure you account for long-term retirement savings as well. You don’t want to be stuck in a new career at an income level where you won’t be able to support yourself when you retire.
On the other hand, you may create two versions of a budget – one in transition, and the other for the longer term. You may be more willing to sacrifice certain want expenses, such as vacation, temporarily, but not forever. It’s also possible to stop saving for retirement for one year to help you make the transition, and resume saving after the transition is complete.
You may want a career change so badly that you are willing to drastically reduce your budget to make it work. That is fine as long as it’s realistic for your family situation. Most importantly, you and your spouse have to be on the same page.
To make an extreme example, you may want to move to a lower paying career that will make you happy. In order to make it work, you can’t even afford rent and have to move back in with your parents for the rest of your life. That may be okay if you have the buy in from all parties involved – your spouse and your parents, but you need to be realistic up front on what that kind of life will be like.
Another place to be realistic is not to cut off the room for want expenses for an extended period of time. In fact, it’s best to assume some seemingly unnecessary expenses to be necessary expenses once in a while.
For instance, you may decide going to a movie is an expense you can cut, even though you actually enjoy it and do it often as dates with your spouse. By cutting your movie budget completely, you are not only cutting off entertainment, but quality time alone with your spouse. So you should either find cheaper date ideas, or make sure you still account for a small budget for movies to keep your relationship healthy.
#2: Evaluate upfront investment and income loss
In addition to your normal living expenses, career change likely requires upfront investment. You may need to invest in courses, trainings or even degrees. For those thinking about starting their own businesses, you may have to make a startup investment. Do the research to understand the full cost of these upfront investments. The cost shouldn’t be a deterrence but a data point to help you evaluate what you need to move forward.
Ideally, you may make some of these investments while still employed in your current career and making an income. Sometimes your current employer may even offer an education allowance. Depending on what your field is, you may also get some assistance to cover some of the cost. (For example, I got a small scholarship to help cover a weeklong residency program.)
On the other hand, you may need to endure some income loss in the interim. You may need to train full time for your new profession, or you may choose to start your own business, which takes some time to grow. Make a conservative assumption on how long you may have reduced income. If you have done step 1 correctly, you should have a realistic number of what you need to survive. Multiply this number by the amount of time you expect to have low income to get to the savings you need.
Your total out of pocket cost is the sum of the total cost of upfront investment plus income loss, minus whatever assistance you may get from other parties. Once you figure out what your out of pocket cost will be, you can move on to step 3.
#3: Build a runway in advance
Career change may be necessary for you, but is it imminent? It’s much better if you are able to build up a long enough a runway so you are able to take off in your new career.
Step 2 gives you the total upfront cost you need to pay out of your own pocket. This means that even if your new career will give you higher income, you need to be able to cover the costs in transition to make it happen. Saving the money and investing in your new career is a big step. It means that you are now taking it seriously, it’s not just a fantasy.
You don’t necessarily have to save up all the cost before you make any investment. You may extend your runway by making the investments while still employed, such as taking weekend classes. In essence, you are utilizing time as a resource instead of more money to make the transition work.
In addition to making career investments in stages, you may also need to build up a cash cushion to support reduced income in the transition period. Whatever number you came up with in step 2, add another few thousand dollars on top so you still have an emergency cushion.
As a backup, also make sure you have low-interest credit available to further increase your runway. Ideally you shouldn’t become debt-ridden just for career change, but it’s helpful to know that you have an extra cushion available for emergencies, or more time to make it work. Get a HELOC on your property for emergency draw, or research a few credit cards with initial zero interest rate promotion. Don’t use them unless you absolutely have to, and set a limit on the utilization so you don’t overextend yourself.
Is a fall back plan necessary?
If career change has its reward, it necessarily comes with risk. You could lose your upfront investment, or even your old career. Many people wouldn’t take the leap because of this risk. Nevertheless, many who have successfully made the career transition said the trick is to do it without a backup plan. The feeling of no turning back is what propelled many to success.
There might be a certain level of truth to that. However, there is also a survivorship bias since you don’t hear too much from people who failed on their quest to make a career change. The pressure of survival may push you more to make your transition work, but not having a backup plan is not the cause for success.
I believe the better way is to set a hard “reevaluation” point in advance so you don’t crash and burn. Your risk tolerance will determine when you stop pursuing the current course of change. You may either turn back or seek new direction.
Everyone will have different criteria. For example, yours may be capping your out of pocket expense at $10,000. Another’s may be not borrowing more than $10,000. Determine in advance how far you are able to go without putting your family in danger. Once you start investing in the transition, giving up is emotionally difficult. You will be inclined to keep pushing the boundary of what’s acceptable.
Note that this is what you are able to do financially, not what you are willing to do. So be realistic, but also don’t sell yourself short. If you have built up a cash cushion or enough household cash flow for trying something new, don’t be reluctant to use your resources to find a new path forward. Your future self will thank you.
I hope this post gives you a blueprint to move forward with a career change that’s brewing in your mind. If you have made a career change successfully, share with me how you structure your household finances to make it work!