Preparing financially for a career change is a huge transition. Not only are you navigating the in’s and out’s of a new business, but you’re also learning how to manage your money. And if you’re starting your own business, you might not break even for a while. To avoid getting into too much debt, make sure you’re financially prepared for a career change by following these tips.
Preparing Financially For A Career Change
How much money do you need?
Do you know how much revenue or profit you will make in your new industry? Will your business provide you or your family with the resources you need to survive? Are you okay with cutting back on spending? Ask yourself these questions before making any major decisions. Figure out your estimated income with your new job or business venture. Now calculate your necessary expenses, including rent, groceries, gas, utility bills, etc. Also include monthly payments, such as student loans, car payments, and credit card debt. Will you have disposable income or a deficit left after deducting your expenses from your monthly income? Use this budgeting worksheet to help you balance your budget.
Saving money isn’t just important for those looking to make a career change. Starting an emergency fund is crucial to everyone. Why? You never know when an unexpected event or life transition might happen. And you want to be prepared financially for anything that life throws at you. To prepare for the unexpected, start an emergency fund. You should have close to six to nine months’ worth of expenses in your emergency fund. After you’ve evaluated how much new income will be coming in, you can start to evaluate the difference between your needs and wants. Your necessary expenses, or needs, are food, shelter, transportation, and medical expenses. Your discretionary expenses, or wants, include clothing, eating out at restaurants, the latest technology or anything that isn’t necessary. If you’re going to be making significantly less than what you used to, you should minimize your discretionary expenses.
As you figure out your new financial situation, you should gradually make your career change. Do what you can at your current job so you can make your transition as smoothly as possible. Take classes, shadow others in your new profession, and develop a plan on how to make your career switch. If you’re starting your own business venture, remember that business may be slow at first. That’s why it will not only benefit you to work as long as possible, but also to work in your old profession for some extra cash if you need it.
Pay yourself a salary.
For new business owners, paying yourself a salary is important. Put your income into a business account and deposit your baseline, or your necessary monthly expenses, into a checking account. Now use your checking account to pay the bills. Paying yourself is key to growing your savings, and you’ll always have the amount you need to cover your baseline. Whatever is leftover in the holding account can be used to pay credit debt, for an emergency fund, or for slower months.