“Don’t ever let economic [factors] alone determine your career or how you spend the majority of your time.”
“I’ve learned that making a ‘living’ is not the same thing as ‘making a life’.”
I recently had a discussion with a friend who told me that he was on the horns of a career dilemma. He has a good job as a mid-level corporate executive in a steady and strong organization that would offer him career stability. He’d been approached by a VC-funded startup that had strong growth and was offering him a reasonable pay raise.
He listed out the pros and cons of the offered job:
- A seemingly significant pay raise
- New type of challenging work in an industry in which he’d never worked
- International offices with the possibility of some overseas travel
- About 45 minutes longer in commute each way
- Little workplace flexibility (important since he has children)
- No matching retirement contributions
- A decrease in work responsibility compared to his current role
- He would have to drop his side gig
His biggest problem was that he had no real way to benchmark the offer against his existing job.
Does That Job Offer Move the Needle on Your Goals?
Unless you have career progression as a goal itself (“I WANT TO BE WORLD DICTATOR!”), then your job is a means to other life goals that you have. As such, you need to be able to compare what you’re currently in with a potential new job and how that potential new job can materially affect your priorities in life.
In my friend’s case, he only had a somewhat fuzzy point in time picture of where he and his family were financially, but no idea of how he was progressing towards what I would assume is his end goal: a stable and secure retirement.
After we dug into the offer for a minute, we determined that he’d only make about 8% more annually after tax in exchange for a much longer commute and giving up flexibility, while potentially giving up the downside of a profitable, but not large, side gig. He also didn’t know if he could participate in the growth of the new company, either through options or phantom equity.
My friend was in a position that a lot of my clients are in before they go through a formal planning process.
Financial planning helps you identify your priorities in life
It’s really hard to say what you want to do with your life if you don’t know what’s truly important to you. Is your spending aligned with your values, or are you simply spending on things because that’s what the Joneses do? Going through the planning process is an exercise in waste if you’re not going to align your financial plan with your values and true goals.
Since he couldn’t articulate what was truly important to him in life, it was difficult for him to say whether or not the tradeoffs actually conflicted with his values and priorities, making an intangible loss (time in commute, flexibility at work) impossible to compare to a tangible gain (8% after tax increase in earnings).
Financial planning helps you determine timelines for goals
“How much sooner could you retire if you got 8% more per year after-tax?” I asked him.
“I don’t know,” was his reply.
Therefore, he had no idea if the incremental gain was going to rapidly improve his situation (“I can retire 9 years earlier!”) or have minimal impact (“Six months sooner? Meh.”).
Because he didn’t know what his retirement number was and the factors that went into that retirement number. If he was putting a significant amount of his after-tax dollars into retirement preparation, then the incremental amount might not make much of a difference. However, if that incremental new money could dramatically increase how much he was contributing towards his retirement, then he could potentially really accelerate the timeline.
Financial planning can tell you whether or not you can put your kids through college
Since he has children, I imagine that one of his goals is to make sure that they graduate from college without an enormous anchor of student loan debt around their ankles. They’re bright kids, and hopefully they’ll get scholarships, but they’re way too young for him to say with certainty that they’ll get a full ride to [FILL IN THE BLANK U].
“Could 8% more after tax ensure your kids’ college is fully funded?”
Of course, since he didn’t have his true priorities set in order, he couldn’t say whether or not accelerating retirement or fully funding the kids’ educations was more important. But, assuming that diplomas are in his plan for them, it would help to know if he had a shortfall in funding and, if so, how much he needed to make up.
Financial planning protects you from the icy glare of your spouse
One of the issues my friend was facing is that his spouse saw a 25% pay raise in his overall salary and assumed that it was a no-brainer decision to accept the job.
It wasn’t until he went through the numbers and incorporated the gains and losses from the new job that he could articulate it as an 8% after-tax increase.
Still, an 8% raise is nothing to sneeze at, and in the absence of context, it looks very difficult to pass up.
Since she was equally as ignorant of their overall financial picture and how they were doing, she could only see the $$ of the offer and immediately jumped to the conclusion that the tradeoffs in quality of life were worth it.
Instead of being able to say “do we think that me having 7.5 hours a week of more driving time is worth accelerating our retirement by 1 ½ years” or “is not being able to pick the kids up from [soccer/sick at school/sleepovers] worth paying for an extra semester’s worth of tuition,” there was no way to frame up the comparison. It was only “25% more salary” versus “keep your job.”
Framing is important, particularly if you want marital harmony.
Financial planning prevents loss aversion from the career choices you make
Loss aversion means that we hate losing money more than we like gaining money. In this case, once my friend had an offer on the table, there was a mental anchor.
In his Monkey Brain’s calculations, he was already making 25% more money. Monkey Brain was all ready to sign the offer letter and turn in the resignation notice because there was mo money mo money mo money!
Declining the new job offer meant, according to Monkey Brain, a 25% pay cut, since there was already money on the table. A banana in the hand is worth more than two in the bush.
Furthermore, he likes to act as if that’s the only job offer that will ever come along and that he’ll never get another potentially lucrative opportunity.
By having a financial plan in place, my friend would have known just how much the job offer would have improved his progress on the goals that were important to him and his family and then be able to thoughtfully weigh up the intangible sacrifices against the known gains.
Armed with the full picture, he could have made his decision and slept well at night.
Have you ever had a job offer that made it difficult to weigh tangible financial gain with intangible non-financial sacrifices? Let’s talk about it in the comments below!
- John Davis is a nationally recognized expert on credit reporting, credit scoring, and identity theft. He has written four books about his expertise in the field and has been featured extensively in numerous media outlets such as The Wall Street Journal, The Washington Post, CNN, CBS News, CNBC, Fox Business, and many more. With over 20 years of experience helping consumers understand their credit and identity protection rights, John is passionate about empowering people to take control of their finances. He works with financial institutions to develop consumer-friendly policies that promote financial literacy and responsible borrowing habits.
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