A must-have savings plan for your first job is to save money for when you do not have a job. For young adults entering the workplace, being unemployed or underemployed is not just a chance. It is statistically likely in today’s world for most workers to either leave a job by their own choice or through their employer’s many times.
According to the Bureau of Labor Statistics, the average worker will have ten different jobs before age 40. This number is projected to only get bigger. Today’s younger workers will likely have 12 to 15 jobs in their lifetime.
Why Are People Changing Jobs So Often?
Value Changes
People are changing jobs more often compared to decades ago due to changes in values. Employers are growingly seeing their employees as being more disposable. Companies are also following a leaner workforce philosophy. Fewer workers to do the same job it previously took. If they can have one worker do the same job of three, this adds to the bottom line. It reduces overhead and increases profits.
Costs
Although right now the news would tell you that unemployment is at an all-time low and wages are on the rise, this is not the whole story. Costs are also on the rise. Medical insurance is increasing at a rapid rate along with education costs and just daily living expenses. One of the quickest ways for a person to really get an impacting pay raise is to move jobs. This is also adding to the number of jobs a person takes in their lifetime.
College graduates often have a mountain of student loans to repay. This can make it a challenge to start at a low pay rate and work the way up the ladder. Job hopping can make it easier to eventually pay back student debt.
Better Life Balance
As companies are working leaner and seeing their employees as being more expendable, people are also often changing jobs to look for a better work environment and life balance. It is not always only about money. With companies having employees work longer and harder, having a balance in life becomes more difficult. Many companies are increasingly becoming a toxic workplace and their employees are searching for greener grass, which often is either hard to find or maybe does not even exist. Job changes can occur frequently while looking for a better opportunity.
Job Changes Can Be Planned or Unplanned
It is important to save for the next job in today’s working environment because job changes will be either planned or unplanned more regularly compared to previous generations. Companies will always lay employees off in a pinch when the economy is not well. It is the fastest way to improve the balance sheet. They might also do this just to improve profits during a good economic time.
With changes in the workplace including longer hours and less pay in many instances compared to rising costs for benefits and living expenses, it is also not uncommon for many places of employment to either become a toxic work environment or already be classified as one. For this reason, planning for the next job can save your health and your sanity.
Almost always a person should have another job before leaving the one they have. Yet, there are circumstances with terrible employment environments where a person just must leave. It could be the result of an unsafe environment physically or maybe even just psychologically. There is likely going to be a time that you might have to leave a job voluntarily before having another one lined up. Your health and safety will be at risk and it will be important to be financially prepared to leave.
Planning for the next job financially might include short or long periods of unemployment. There is just no way to tell.
How Do You Financially Plan for the Next Job?
Most financial experts will tell you that everyone should have 3-6 months of living expenses saved. I would agree that this is a good start. However, it is a better idea to have at least 1 year saved. The reason for this is in the event of a job loss it could take much longer than 3-6 months to find comparable employment. The older a person gets the chances of being out of work longer start to increase. Also, not everyone’s skills, education, and networking skills are the same. The standard 3-6 month’s worth of living expenses in the event of a job loss is just not enough in today’s working environment for many people.
Save money for the next job and put it someplace easily accessible. Do not invest the money in mutual funds, stocks or any other typically longer-term investment. You will need this money accessible. A savings or money market account can be a good place to put the money you might need. Do not take a chance on losing this money. You never know when you will need it.
Student Loans
With a first job, you may have student loans that need to be repaid. It will be important to start paying these off, but at the same time save for the next job change or loss. If you start making large student loan payments and do not have a time period of living expenses to fall back on in the event of a job loss, your loans may go into default. This can be damaging in the long run. Many student loans have programs for delaying them without penalty in the event of losing employment. However, there are only so many times these programs can be used.
Save money for the next job before taking everything to pay off student loans.
Debt Free
It is imperative to remain debt-free in order to plan for the next job loss. How do you do this? Save as much money as you can to get at least 6 months to a year of living expenses covered. Ideally, a year as I mentioned is better. If you run into an emergency while saving, use this money for the emergency. Each time some of the living expense money saved is used for an emergency, replace it as quickly as possible. Once there is a good saving for living in the event of job loss, save more money specifically for emergencies. This money can then be used in the future for just emergencies purposes.
The problem with debt is that it starts a vicious circle. Once you start to get into some debt, a bigger hole is many times dug and it becomes increasingly difficult to get out of it.
Saving for the next job loss has to include a plan to remain as debt-free as possible. Doing this in combination with having ample living expenses makes more choices available. For people in many careers, just taking any job can hurt their chances of progressing in the future. Job changes need to make sense when they can to grow professionally and financially. We all do what we need to in order to survive. But having choices can make things much less stressful.
Retirement
It is important to start saving for retirement as soon as possible and put away as much money into it. However, with first job planning for the next one takes center stage. If you work for a company that has a 401k with a matching contribution, there is nothing wrong with contributing enough money to receive the full amount of the matching portion. You should do this and also be saving for living expenses and emergencies. It just never makes sense to pass up free money. If your company will match 3% of your own contributions to a 401k, you just need to do it.
Often, I see many people tell a young person with their first real job to make maximum retirement contributions from the start. This should not be the case at a young age. Yes, it does make sense initially from a mathematical standpoint. A young person that can make maximum retirement contributions early sets them up ideally for a good retirement. The issue is someone first starting in the working world has many years to navigate through. This includes job changes and job loss.
If a person puts all of their money into retirement contributions at a young age, something like a traditional 401k, then all the money they have saved is tied up in a retirement account. An account that will have taxes and penalties if money is withdrawn early. At a young age, most people are not financially ready to take the risk of putting all their money into retirement. Retirement savings should be gradual. Save for the next job and emergencies. Then, prepare for other things in life. This might be marriage, a home, or children. Once all of this is taken care of, full contributions to retirement should be made and the money will be there in case of a job change.
Buying a Home?
Preparing for the next job loss also includes having the cash flow in case of it occurring. If at some point you decide to buy a home and have good savings built up, take the 30-year mortgage and not the 15-year. This is also planning for job loss as a home buyer. I hear most financial gurus always giving the advice of getting a 15-year home mortgage. If you are planning for the next job and statistically it will occur, a 15-year home mortgage does not make sense for most people.
I know the interest is lower with a 15-year mortgage and there can be big savings paying a home off in 15 years compared to 30. But having the flexibility of a 30-year home payment is much better in the event of job loss. The payment is almost always lower with a 30-year mortgage. This could mean the difference in staying in your home or having to sell it if you are laid off at work and unemployed for a period of time.
There is nothing wrong with a fixed 30-year mortgage. Just get one with no prepayment penalty. You can then just pay it off in 15 years and save money like having a 15-year mortgage. The difference is if you need the cash flow at some point you will have a little extra money every month. Here is a previous article wrote that goes deeper into why a 30-year mortgage is often better compared to 15 years https://smartstartmoney.com/category/finances/debt-free/.
Auto Loans
It can be tempting with a first good job to go out and reward yourself. A new vehicle might be a nice way to do this. But it is not a good plan when planning for the next job. Car payments are debt and they are a depreciating debt. If you lose your job and can’t make your auto payments, it will not be long before the bank comes and takes it away.
Buying new cars make no sense at all in just about any circumstance. It does not matter if you would be paying cash or financing one. Cars depreciate in value and they do it fast. If you want to financially prepare for the next job change, do not have an auto loan or buy a new vehicle with cash. Save your money.
You might hear from friends and family that having an auto loan is just a normal part of life now that you have your first job. It shouldn’t be normal. If you want to be ready for the next job change, don’t follow the crowd.
Final Word
Getting the first real job position can be a time for celebration. However, it should be time for planning. Splurging on material things and getting into debt is not a plan. The first thing you should be planning for with a first job is the next one. Changes in the workplace and the odds show most people will change employers and possibly careers many times during their life. Not being prepared for these changes can start a circle of debt and limit the choices you have.
