Investing for Life: Managing your money when changing jobs

Changing jobs if often difficult, but it can become downright traumatic if you have shaky finances. Whether you suddenly lose your job or are planning to make a change, you can take a number of steps to smooth the transition.

Here some key financial moves to make when dealing with a job change:

Check your cash cushion

The average length of a job search is five to seven months. It could take even longer if you are employed in a sector that's contracting. You'll need more time to shift your skills to show you're qualified for a job in another sector with more opportunity. This is why it's important to have at least six months of cash on hand to meet financial obligations while job hunting.

If you don't have that much, consider these moves to increase your cash cushion:

  • Decrease your 401(k) plan contributions to the minimum required to collect your employer's company match (typically six percent of your pre-tax pay). The increase in net pay should be used to build up your emergency fund.
  • Eliminate all unnecessary payroll deductions, such as savings bonds or charitable contributions. Again, use the extra cash flow to bolster your savings.
  • Reduce your income tax withholding from your pay, especially if you typically receive a tax refund. Use the extra money to build your cash stash faster rather than waiting until the spring to get that refund check.
  • If you aren't still at your job, look for sources of new income. See if you can pick up some temporary work to generate some income.
  • Of course, you should decrease any extra spending immediately. You may even want to return recent large purchases or sell some personal items to build a nest egg.

Access more credit while you still can

Remember the truism: credit is easier to get when you don't need it. One easy source is to ask your credit card company to increase your spending limit. Shop around for a card with the lowest interest rate since you may need to carry a balance for a while.

Also, if you own a home worth more than your mortgage, establish a home-equity line of credit. You'll need to do so while you are still working because the bank will want to verify your employment and pay.

Make your benefits portable

A job loss can disrupt critical health coverage. If your spouse is employed, check with his or her employer to see what is required to get covered under that plan. If that is not an option, look into your employer's policy for health insurance continuation coverage, or COBRA.

Most employers are required by law to allow you to pay for and continue coverage in their plan for up to 18 months. Also look into switching to a health insurance plan with a high deductible. These will usually be the lowest cost option.

Don't forget to replace any employer provided life insurance that you rely upon. Low cost term life insurance is easy to get from online sources. In addition to being portable, getting a personal term life insurance policy is usually less expensive than coverage under employer plans, which is an added bonus.


You'll eventually want to rollover retirement savings in your company's 401(k) plan to the plan at your new job or to an individual retirement account.

But, for people who have borrowed from their plan who are changing jobs, the most immediate need is to pay off that loan. If you have an outstanding loan from your 401(k) plan, most companies require you to repay the loan within 30 days of termination or they will treat the loan amount as a distribution. This creates a tax and penalty ambush for an unsuspecting job changer because income taxes (and early withdrawal penalties if under age 59-and-a-half) will be assessed on the amount of your loan.

An action plan for job changers:

Before you leave your job:

  • Increase your savings by decreasing contributions to retirement plans and tax withholding
  • Increase your credit card limit and access a home equity line of credit
  • Increase cash flow by eliminating unnecessary payroll deductions
  • Reduce discretionary spending

After you leave your job:

  • Pay your mortgage or rent first
  • Pay utility bills second
  • Make minimum payments on bills where possible
  • Pay off any 401(k) loans
  • Eliminate all unnecessary expenses such as cable TV, extra mobile phone services and subscriptions

Remember that a good defense can be the best offense. Even if you feel secure at your job, being prepared financially -- including having a cash cushion that can last at least six months -- will lessen the blow if you lose your job unexpectedly.

  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.

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