Changing jobs? It pays to check your finances before you take the plunge

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Before you quit your job, figure out if you’re financially prepared to make the leap

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In an ongoing series, the Financial Post explores personal finance questions tied to life’s big milestones, from getting married to retirement.

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Allan Small was about 25 years old when he made his first big career shift, from employee to his own boss. “I went from not having to worry about getting clients to starting from zero. It was scary, but it was an opportunity to really launch my career.”

Now a senior investment adviser at iA Private Wealth Inc., he has approached each next career step the same way he approaches taking a position in a stock: he assesses the opportunity and the risk. “It’s easy to just think about all the anticipated positives, but what happens if it doesn’t work out? What pieces do you have to put in place to make sure you are OK?”

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Changing jobs or even careers is something most people experience at some point in their working lives. But the stresses of the past two years and the country’s near full employment are driving more people to consider a move, whether it’s shifting to new jobs in their industries, making wholesale career changes or starting their own businesses.

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More than one-third of Canadians are either considering or are unsure about leaving their jobs, according to a survey by HR services company LifeWorks Inc. Nearly three-quarters would leave a job they’re happy with for more money.

The findings are in line with what fee-for-service financial planner and Unconventional Wisdom blogger Ed Rempel has been seeing among his own clients.

Nearly three-quarters would leave a job they’re happy with for more money.
Nearly three-quarters would leave a job they’re happy with for more money. Photo by Getty Images/iStockphoto

“Employers are paying more and people are taking good opportunities to move up. Others have discovered they like working from home and are setting up home-based businesses,” he said.

“I’m also seeing people who want to leave or retire, especially teachers and people in health care, but they think they can’t because of salary, benefits and pension.”

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Rempel’s advice to people considering a job change is to be financially prepared to make the leap.

“This will help you build confidence in making a move and prevent fear from guiding your decision,” he said.

Get down to basics

For example, figure out your monthly cash flow — the money you have coming in and the money you have going out — and the income you need to meet your expenses.

“We see a lot of people moving from a salaried position to a contract position, where income may be less certain,” Rempel said. “It’s important to know what you will have left after tax and if it’s enough.”

If you know your income may be lower, at least for a little while, he suggests adjusting your budget to cut back or postpone discretionary expenses such as restaurants or renovations. If you have credit-card debt, get rid of it before you make the move.

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Furthermore, you should create a transition plan and time your move.

“If you don’t have a plan, create one,” Rempel said. “If you do have a plan, take a close look at it and think about how a job change will impact that plan.”

For example, if you want to buy a home at the same time you’re planning to leave a salaried position to become self-employed, get the financing in place before you resign.

If you don’t have a plan, create one

Ed Rempel

“You need a two-year track record of regular income to qualify for a mortgage,” Rempel said.

Whether you’re going from one salaried job to another or striking out on your own, it’s important to know you have enough money put aside in case things don’t go as planned.

“I call it a slush fund,” Small said. “It’s a source of money you can rely on so that you can buy groceries and meet all of your expenses.”

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This is why understanding cash flow is so important, especially given that one-third of Canadians spend their entire paycheque in a pay period, and 26 per cent say they would not be able to come up with $2,000 to cover an unexpected expense.

Rempel advises having enough money put aside to cover expenses for three to six months.

“Think through the biggest expense that could come up and how much you might need,” he said. “The money doesn’t have to sit in a savings account that is paying no interest. It can be investments you can access quickly, a secured or unsecured line of credit that costs nothing, a TFSA (tax-free savings account).”

Consider the tax implications

Every change in situation has its own implications and multiple levels of tax to consider: Will your tax bracket change when you change jobs? If so, this will impact tax planning. If you are starting your own business, what type of structure do you plan to put in place? Will you be self-employed? A sole proprietorship with employees? Do you plan to incorporate?

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“Educate yourself,” Rempel said. “Get the answers you need to make an informed decision.”

Similarly, make sure you do the math on your existing/future benefits packages. Is there a pension plan, group registered retirement savings plan (RRSP)? What kind of health coverage, vacation time can you expect? How does it compare with what you already have?

“With more job openings today than people to fill them, I think you can be more picky and expect more,” Small said.

On the flip side, benefits and pensions should not be the reason you stay in a job, Rempel said.

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“People feel a pension plan is such a safe thing, but pensions invest a large part of their funds in bonds, which are paying about 1.5 per cent now,” he said.

If you leave a job with a pension plan, you have options: leave it where it is and when you retire; receive an annuity; transfer it to your new employer’s pension plan (assuming it has one); or take it out and invest it.

Any job move is also a good time to review your life insurance coverage to make sure it meets your needs.

With more job openings today than people to fill them, I think you can be more picky and expect more

Allan Small

“If your income and lifestyle expenses increase, you may need more income replacement insurance,” Rempel said. “Make sure your beneficiaries are up to date.”

If you’re thinking about a job change, take stock of where you’re at and create a plan. This will help you start from a position of financial strength while you get used to your new situation.

Financial Post

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