After a bout with unemployment, your recent job offer was a welcome relief. And along with steady pay, comes a new set of financial opportunities and challenges to boot.
In the current economy, however, it may not offer the same salary, benefits or career trajectory, especially if you relocated, accepted temporary contract work, or sought employment outside your traditional area of expertise.
As such, the newly rehired need to step back and assess how their current compensation might impact both their short- and long-term financial goals , says Michael Haubrich, a fee-only financial planner with Financial Service Group in Racine, Wis., who specializes in career transition.
“You can’t view your job as temporary and assume you’ll eventually get back to where you were before—that you can just use your credit cards to fill in the gap,” he says. “If you are not sustainable in terms of your current income and spending, based on your new reality, then you have got to get there fast. That may mean changing your standard of living.”
Assess Your Cash Flow
Sherrill St. Germain, founder of New Means Financial Planning in Hollis, N.H. who specializes in career-change financial planning, agrees, says it’s not just your salary that you need to consider.
“Be sure to not just focus on the difference in your salary because benefits are important too,” she says. “If you’re contributing more towards your health, life or disability insurance or you no longer have a cafeteria plan or if any of those are less feature-rich than your old employer’s plan, it’s going to hit you in your cash flow.”
If your spouse is employed, she notes, it may be more cost effective to put your family on his or her health plan.
Likewise, if you’re relocating for your job, be sure to factor in any changes to your property taxes or cost of living (housing, groceries, etc.), which can impact your monthly cash flow significantly.
St. Germain’s cash flow questionnaire makes it easy to compare your new financial reality with your old one.
As you crunch the numbers, don’t forget to consider your income-tax scenario.
Depending on your new salary, you may need to adjust your federal income-tax withholding to be sure you don’t owe money come April 15—or end up getting a fat refund (the equivalent of an interest free loan to Uncle Sam.)
The IRS provides a withholding calculator on its Web site.
“That’s one piece that often gets overlooked, making sure your withholding is set right,” says St. Germain. “If you went from a two-income couple to a one-income couple for a period of time, you’re going to need all the cash flow you can get and if you’ve been out of work for six months or more you’re going to owe significantly less that year in taxes.”
Once you’ve determined what your take-home pay will be, it’s time to evaluate your priorities and make adjustments to your spending patterns as needed, says St. Germain.
Though it depends on your financial picture and personal goals, most financial planners suggest average working stiffs spend no more than 30 percent of their monthly income on housing expenses.
Another 15 percent can each be allocated for transportation and food, with at least 10 percent going towards savings, including IRAs and 401(k) retirement plans.
The remaining 30 percent can be used for debt repayment, entertainment, and other living expenses (clothes, health care co-pays, etc.)
If you borrowed from your emergency fund during the months you were unemployed, you’ll also need to rebuild that.
Conventional wisdom has long held that savers should sock away between three and six months worth of living expenses in a liquid, interest bearing account like a money-market fund, Certificate of Deposit or short-term U.S. Treasuries. If you're self-employed, then the fund shoukd cover up to a year’s worth of expenses.
In today’s job market, however, that may not be enough, says St. Germain.
“For anybody in high-tech, financial services or other sectors where things continue to be uncertain I would suggest six months or more is necessary, especially if you’re the sole breadwinner,” she says.
Road To Retirement
And let's not forget your nest egg.
Depending on how long you were out of work before being rehired, you may have some catching up to do—particularly in your retirement savings.
If you’re already maxing out your 401(k), consider making extra payments towards a Roth IRA or traditional IRA, or having a spouse funnel more towards his tax-advantaged retirement plan. (A self-employed spouse may be able to direct more towards his or her SEP or Solo 401(k) to keep your retirement savings goal on course.)
“If you qualify, I’m a big fan of Roths,” says St. Germain, noting you’ll get no upfront deduction for your contribution, but earnings grow tax-free. “You are building what needs to be a giant nest egg so if you are Roth eligible that would be a really good place for extra savings to go.”
But don’t put all your savings into a tax advantaged account, she warns.
You’ll want some flexibility to withdraw money penalty-free should the need arise, and multiple accounts are a good way to hedge your bets given the uncertainty of future tax rates.
“If you’re already investing in a 401(k), or at least enough to get the employer match, you may want to save in a non-tax advantaged account like an investment account that you can use without penalty,” says St. Germain. “Mix it up so you have your retirement next egg in buckets with different tax features because that’s one of the things that are most uncertain – what’s going to happen to tax rates by the time we all retire?”
Second Safety Net
Considering your recent job loss, you’ve no doubt learned the importance of creating a financial safety net should you ever find yourself out of work again.
Apart from having an emergency fund, homeowners who are credit worthy should also set up a home equity line of credit, says St. Germain.
HELOCs are a form of revolving credit in which your home serves as collateral.
Most involve variable rather than fixed interest rates and tax-deductible interest payments, allowing homeowners who qualify to borrow in part or as a lump sum as needed for home improvement, education expenses or periods of unemployment.
Bear in mind that your HELOC is secured by your home. If you don’t pay what you owe, your house could end up in foreclosure.
While budgeting based on current income is critical, Haubrich suggests the biggest favor you can do for your finances is to quantify your value in the modern-day job market.
“Your career is your most valuable asset you have, producing greater financial returns than anything else,” he says. “In the new economy, it’s all about optimizing your career.”
Based on your skill set, experience and education, it’s important to benchmark what you’re worth to employers today. And not just those in your immediate industry.
“Has the economy moved away from you to where you’re never going to find that job that you lost again and this is the new paradigm?” Haubrich asks, noting his career coaches direct clients towards industries and jobs that help maximize earnings potential.
To that end, Haubrich recommends creating a separate “career asset working capital fund”, that allows individuals to fund lifelong learning and skill development classes, along with voluntary career sabbaticals. (Money earmarked for education expenses can be funneled into a 529 tax-advantaged college saving fund.)
“When you’re in the midst of a career transition, it is not a time for asset accumulation,” he says. “This is the time to optimize your career assets.”
Though no one likes losing their job, the lessons learned from unemployment often lead to a more responsible spending philosophy—and ultimately, a more secure financial future.
“In this world where anyone could get laid off at any moment for any reason, it’s better to err on the side of undercommiting to fixed expenses,” says St. Germain, noting the pre-recession school of thought was to buy as much house as you could afford and live beyond your means. “I think the mentality has changed and I’m keeping my fingers crossed that it sticks.”