4 Financial Moves to Consider When You Change Jobs

Starting a new job can be a pivotal time in your life. Chances are you are getting to do something that better levers the skills and experiences you’ve built over your career. It’s also a time when you’re likely being rewarded financially for all that hard work. Consider these 4 tips to make sure you’re capitalizing on the momentum of your new role:

1. Get Your Financial House in Order

With the fresh start a new job offers, it’s a great time to get an understanding of  your current financial position. You’ll go a long way in understanding your financial health by doing two things:

Create Your Net Worth Statement: (everything you own, minus everything you owe). This can be as detailed or as high level as you like, but your net worth is essentially your financial scorecard. You can keep increasing your paychecks, but if you aren’t converting some of that income into assets (cash, savings, retirement accounts, investments, business assets,etc.) that you can see on your balance sheet (another name for net worth statement), you’re just a hamster on a wheel. You need to be putting some of your income into assets on your net worth statement.  Keep in mind, paying down the principal on your debts (student/auto/credit card and mortgage loans) also increases your net worth. 
 

Understand Your Cash Flow: Cash flow is a fancy term for money coming in less money going out. Cash flow is by far the most important financial metric for most people. Making sure that you aren’t going beyond your means is the single most obvious, yet difficult financial task for most people. There are some great tools to help with this (mint.com, ynab.com, old fashioned pencil and paper, etc.), but you need to create some way to help you make sure that you’ve got cash flow under control. It’s very easy to fall into the trap of increasing your expenses since you’re now getting paid more in your new job, but your future self will thank you if you start saving some (or maybe all!) of that extra pay. Lifestyle creep, or increasing your expenses as fast as your income, is a dangerous habit. Before you get used to spending all of your new income, take time to understand your cash flow so that you make the most of it. We recommend automating the good things in your cash flow (retirement savings, rainy day funds, travel bucket, debt payments), while making yourself more mindful in areas where you have a tendency to overspend.  For our clients, we use First Step Cash Management System to take all the thinking out of day to day spending decisions that can wreak financial havoc.

2. Consolidate Old Accounts

As you start a new job, you’ll likely be contributing to a new 401k/403b plan sponsored by your company. Don’t neglect your old 401k plan! You have several options for your old plan:

• Roll it to an IRA: this is the most common action. You roll the money in that plan to an IRA, often giving you many more (and lower cost) options for investment. This can be a great opportunity if your old plan had poor investment choices. A rollover like this is tax/penalty free and most of the time a great choice.

• Roll the assets into your new plan: If your new 401k plan has great investment options (look for low expense ratios), you like the idea of having only 1 retirement account, and the plan allows you to roll in outside assets, this can be a good option.

• Taking out your money (NOT RECOMMENDED): for many reasons, this is a terrible idea. If you’re considering this, stop reading now and reevaluate your life choices!

If you have other accounts from previous jobs, this serves as a good time to consolidate those as well. Having too many accounts increases the odds that you don’t know what’s happening in your financial world. The simpler your financial life, the better.

3. Make the most of your New 401k Plan

It’s likely that your new company is offering a 401k plan. Here are some tips when making your 401k choices.

• At a very MINIMUM, make sure you are contributing enough to get the maximum match your company offers. This is FREE money!

• Make sure you have a mix of stocks and bonds. The younger you are, typically the more aggressive you want to be. For someone in their 30’s or 40’s this might mean 70-90% stocks. For someone later in their career, a less aggressive mix is likely prudent. You want some US Stocks (large and small), International Stocks (Developed and Emerging Markets) and some bonds (high quality and short term).

• Look for funds with low expenses. High costs will eat away at the compounding effect investing offers. Look for the term ‘index’ as you evaluate funds. They are often less expensive and will likely perform better than their active counterparts in the long run.

• If your plan offers ‘lifecycle’ or ‘target date’ all in one options, you are looking for the fund that matches the approximate date that you expect to be retiring.

4. Review your Other Benefits:

Your company likely went to a lot of trouble to offer you some nice benefits. Make sure you're maximizing what they offer. 

Hopefully your new company offers health insurance.  Take some time to review your plan’s options. If you aren’t sure how to decide, ask the HR person or a financial planner for some guidance. Making a hasty decision can come back to bite you down the road. If you are younger and a relatively infrequent user of healthcare, a combination of a high deductible (typically lower monthly cost) plan and a health savings account can be a great choice if it’s available.

Many health plans offer incentives for healthy behavior. Keep an eye out for provisions that may offer discounted premiums or rebates in exchange for things like getting an annual check up or going to the gym. The company and you win through lower costs when employees take care of their health.

Do you get life insurance? Often times, your company will provide some life insurance coverage for you at no cost. You may also have the ability to purchase supplemental coverage. Did you lose coverage provided by your old firm? Do you have outside policies? Do you even need life insurance? These are questions to consider as you evaluate your selections. A simple question as you consider whether you need insurance - is anyone (spouse, kids, etc.) depending on your income? If so, it’s likely you need some. (Hint: It’s unlikely you  need whole or variable universal life. Think term life.)

Do you have daycare expenses for kids? If so, taking advantage of a dependent care benefit can save you significant money in taxes. These accounts allow you to pay for up to $5,000 (limit for 2017) of qualified child care with pretax money. This could save you up to $2,000 in tax depending your income and other tax factors.

Perhaps you have the chance to participate in an employee stock purchase program. This can be a double edged sword. This benefit gives you the chance to purchase shares of your company’s stock at a discounted rate (typically 5-15%). This can be a nice supplement in building your wealth, but you want to make sure that you don’t have too much of your net worth (10% max) tied up in your company. This can spell disaster if the company does poorly, potentially drying up your income and hitting your assets at the same time. Consider this benefit cautiously.

Congrats on your new position! Starting a new job is an exciting time. With a little thought, you can greatly improve your financial trajectory by making thoughtful, intelligent decisions with your new salary and benefits. If you’d like help in making these decisions, schedule some time to talk with us.