5 Money Moves When Starting a New Job
Moving on to bigger and better things in your career is no small feat. Doing so during a global pandemic is borderline heroic. According to the Bureau of Labor Statistics, the average American worker holds 12 different jobs during his/her lifetime. This number is only increasing as younger generations settle into the workforce. Spoken from personal experience, sometimes networking and searching for the next amazing opportunity is just as much work as the job itself. After you’ve clinched your dream job, there’s a lot to consider from a financial planning perspective. Consider making these 5 money moves when you start a new job.
1. Review cash flow
Starting a new job is super exciting, and in some cases, it may result in a higher income. Instead of blowing the extra money on random, quarantine-induced Amazon orders, consider using it to save more or pay down debt. Look at your new income and compare it with your monthly expenses. While your income may go up, so too might your expenses if you are moving to a new city or enduring a change in commute. Will you be making more than you spend or vice versa?
If you earn more than you spend each month (and have a cash flow surplus), consider ramping up your savings into your cash reserve or retirement accounts. Generally speaking, you should save between 3 and 6 months of your living expenses in a secure, liquid account for emergencies. If your company offers matching 401(k) or 403(b) contributions, this is a great place to save into and take advantage of “free money” from your employer. Next, consider maxing out your Roth or Traditional IRA to ramp up retirement savings.
If your priority is paying off debt such as student loans, credit card debt, a mortgage, etc., start by focusing on aggressively paying the high-interest debt first. This method is referred to as “snowballing,” and it can result in lower total interest payments over time. Your best bet may be a unique combination of simultaneously saving and paying down debt.
2. Opt into employee benefits
Did you know that your salary, on average, accounts for just 70% of your total compensation package? In other words, according to the U.S. Department of Labor, employer-provided benefits—including health insurance, life/disability insurance, retirement plan contributions, paid leave, healthcare spending or reimbursement accounts, etc.—make up around 30% of your total compensation. It’s important to take full advantage these benefits!
Start by opting into health, dental and vision insurance through your employer, as needed. Don’t forget to open up a health savings or reimbursement account, if available. Your employer might offer a Health Savings Account (HSA) or Flexible Spending Account (FRA) to use for health-related expenses. Make sure to find out if they will make matching or other contributions, as well. A lot of people don’t know that their company might contribute money into these accounts each year.
Next, consider opting in to your company’s group life and disability income insurance plans. You may pay a lower premium compared with getting individual coverage outside of work, and these plans typically do not require underwriting. Keep in mind, however, these benefits will probably only last during the time you are employed with the company offering them. So, if you switch jobs again or retire early, you’ll need to get these benefits elsewhere. Learn more about what to consider when searching for life insurance.
3. Set up retirement contributions
How great is using cruise control in your car during long road trips? During a move a few years back, I rented a U-Haul truck without cruise control for a 6-hour drive on a long stretch of boring, midwestern highway. You simply Don't Know What You Got (Till It's Gone)! Incorporate the same convenience with your retirement savings by opting into your employer’s payroll deduction plan.
Try to at least save enough to take advantage of your employer match, if your company makes matching contributions. For example, suppose your company offers a 5% 401(k) match, and you earn $100,000 per year. If you personally contribute 5% of your salary to your 401(k), your company will contribute that same amount for a total annual amount of $10,000 going into your account ($5,000 each). If you found $5,000 on the ground, would you pick it up??
You will likely have the option to contribute into a tax-deferred retirement plan, such as a Traditional 401(k), and/or an after-tax plan, such as a Roth 401(k). Weighing the two options shouldn’t be paralyzing, as it really relates to when you want to be taxed—now vs. in retirement. Simply put, if you believe your income is higher now than it will be in retirement, consider saving into your tax-deferred (Traditional) account, because your tax rate will likely be lower in retirement when your income is lower. On the other hand, if you believe your income will be higher in retirement than it is today (which may be the case for many savers early in their career), consider saving into the after-tax (Roth) account. You’ll be taxed on the contribution today at a potentially lower rate. Many investors will benefit from saving money into both tax-deferred and tax-free accounts in order to diversify savings from a tax perspective.
4. Do something with your old retirement plan
When you leave behind a retirement plan such as a 401(k) or 403(b) with an old employer, you usually have three options with it. You can 1) leave the retirement plan where it is, 2) move it to your new retirement plan with your new employer or 3) rollover your retirement plan into an IRA. Consider the pros and cons of each option below to determine what makes the most sense in your situation:
Leave it be
Pros:
No extra work to consolidate the account
Favorable divorce and bankruptcy rules among employer-sponsored plans vs. IRAs
Potential loan options not available with IRAs
Cons:
May be hard to keep track of this “extra” account when making investment and eventual withdrawal decisions
Potentially higher investment costs vs. options in an IRA
Limited investment options vs. IRA
Move to new 401(k)
Pros:
Consolidating can make investment management easier (one less account to keep track of)
Favorable divorce and bankruptcy rules among employer-sponsored plans vs. IRAs
Potential loan options not available with IRAs
Cons:
Potentially higher investment costs vs. options in an IRA
Limited investment options vs. IRA
Takes some up-front effort to move the account
Rollover to IRA
Pros:
Consolidating can make investment management easier (one less account to keep track of)
Infinitely more investment options available in IRAs as opposed to employer-sponsored plans
Potentially lower investment and management costs in an IRA
Cons:
No loan provisions in an IRA that may be available with your employer-sponsored plan
Unfavorable divorce and bankruptcy rules as compared with employer-sponsored plans
Takes some up-front effort to move the account
Many investors choose to rollover their old retirement plans into a personally-owned IRA for investment selection and cost-related reasons. Also consider the fact that making tax-saving decisions such as Roth conversions is often easier to do with IRAs.
5. Start or review your financial plan
Starting a new job is the perfect time to start or revisit your financial plan. So many things change that can have a huge impact on your future financial situation, and it’s so important to get ahead of those changes and set good behaviors to build your wealth. And, of course, working through your financial plan will result in confident decisions in the four areas that precede this section. Because all aspects of your financial life work in tandem with each other, making a decision in one area can have drastic effects in another. For example, increasing retirement savings after a job change might reduce your cash flow surplus, but it could result in an early retirement by several years.
If you don’t work with a financial planner, consider reaching out to a couple to learn how you can benefit from a comprehensive plan and investment strategy. Consider 8 Questions to Ask a Financial Advisor as you shop around. If you already have a financial plan, reach out to your advisor to make sure you are on the same page with him/her about the important changes in your life. Updating your financial plan may involve changing your planning data such as income, expenses, insurance, taxes, and goals along with revisiting net worth growth and retirement forecasts.
Do you want to talk about how to make the most of a recent or upcoming job change? Reach out to me at Ben@coveplanning.com or schedule a free consultation call.
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Ben Smith is a fee-only financial advisor and CERTIFIED FINANCIAL PLANNER™ (CFP®) Professional with offices in Milwaukee, WI, Evanston, IL and Minneapolis, MN, serving clients virtually across the country. Cove Financial Planning provides comprehensive financial planning and investment management services to individuals and families, regardless of location, with a focus on Socially Responsible Investing (SRI).
Ben acts as a fiduciary for his clients. He does not sell financial products or take commissions. Simply put, he sits on your side of the table and always works in your best interest. Learn more how we can help you Do Well While Doing Good!
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Ben Smith, and all rights are reserved. Read the full Disclaimer.