Knowing Where You Stand

Analyzing Your Net Worth

For purposes of your career transition, the following aspects of your net worth warrant special attention.

Emergency Reserve Fund

If you've been a good saver, as part of your net worth you should have an emergency reserve fund typically equal to three to six months of basic living expenses. This fund should be in a liquid account, such as a bank account or a money market fund. Unfortunately, not everyone plans for a rainy day or is in a position to build up their cash accounts. If you don't have adequate cash reserves, you may need to sell some of your assets if you can't find (or you are ineligible for) additional financial assistance during your career transition.

Does your emergency reserve fund have enough money in it? You'll need to examine your cash flow and additional sources of income. See the section Creating a Cash Flow Statement and Where Will the Income Come From?.


In the event your emergency reserve fund is not adequately funded, you may need to sell some of your assets. A liquid asset is something you own that you can sell immediately and convert into cash with minimal loss of principal. Illiquid assets take a while to sell. Here are some examples of assets along the liquidity spectrum from most liquid to least liquid:

  • cash
  • bank savings or checking accounts
  • money market fund
  • mutual fund
  • publicly traded stocks and bonds
  • life insurance and annuities cash value
  • investments in retirement plans, IRAs, Keoghs, & 401(k) plans
  • personal property (vehicles, furniture, jewelry, etc.)
  • real estate
  • non-publicly traded stocks and bonds
  • business ownership interest

Determining the relative liquidity of your assets is important since you may need money to pay bills without your regular salary. Keep in mind that you don't want to be in a position of having to sell some of your assets when their value may have temporarily dropped, just because you have to pay a bill or handle your ordinary living expenses.

Making it through your career transition financially may mean reevaluating your short-term and long-term objectives. Having assets invested on the illiquid side usually means that you are positioned for long-term, tax-deferred growth. Although it may not be your intention, an extended career transition may require you to eventually draw upon some of your illiquid assets. If this is the case, you will need to plan well in advance, since turning these assets into cash may take time.

Are your assets liquid enough?

Non-Retirement Assets

Diversification means not having all your eggs in one basket... some in stocks, some in bonds, some in cash... you get the idea. A well-diversified portfolio typically reduces the risks associated with having too few investments.

While many young people have much of their wealth invested in their home, others keep all their money in bank accounts and refuse to invest in stocks. Both of these strategies have risks.

Now is a good time to reconsider how your assets are invested. During your career transition, it is probably wise not to assume too much risk. You may need cash for expenses. The worst time to sell an investment could be when you need cash. A temporary downward fluctuation in an asset's value may leave you with less than you'll need, should you find yourself having to cash it in. Depending on the size of your emergency fund and the amount of time you think you'll be out of work, you may want to consider repositioning some of your existing investments. 

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Retirement Assets

Many companies or organizations have a tax-deferred savings program in which you elect to contribute a percentage of your income. How substantial your savings are depends on how much you contributed, how long you participated, and the plan investment options you selected.

If your sources of income and emergency reserve fund are inadequate, you may need to use some of these assets to pay your expenses. In some cases, these funds may not be available or may be subject to penalties upon withdrawal; e.g., if your employment is terminated and your employer does not have a 401(k)-loan provision, or you do not meet any expectations for imposition or penalties on early withdrawal of 401(k) funds. Because of the short-term tax implications and long-term impact on your retirement savings, we recommend that you avoid dipping into these funds until absolutely necessary. If it looks like you might have to pull out a few dollars, consider temporarily weighting your portfolio in favor of cash and short-term bond funds. You'll need to minimize short-term volatility.

Depending on your employer's plan, you may need to move these funds out of the company plan upon terminating employment. See the section Rollovers to your IRA to find helpful information on how to keep your retirement saving working for you when you change jobs.

The section Where Will the Income Come From? also discusses the use of retirement assets in a career transition.

Have you reviewed your retirement plan's asset allocation recently?


It is especially important to keep an eye on your debts during your career transition. If you must borrow, borrow smart. Avoid new credit card debt whenever possible. The following liabilities may warrant special attention during your career transition:

  • Balloon mortgages. It may be difficult to refinance this obligation while you are unemployed.
  • 401(k) loans. It may be necessary to repay your outstanding loan balance prior to terminating employment or within a set time frame after termination. Many plans will consider an unpaid balance a taxable distribution if you leave the company and do not repay the debt. Make sure you discuss the terms and conditions of your 401(k) plan with your employer.

For more helpful information on how to borrow money from your retirement plan, see the section Borrowing from your 401(k) Plan.

Your Personal Bottom Line

During your career transition, your goal is to maintain as much of your net worth as possible. To do this, you should:

  1. make your transition as quickly as possible;
  2. reduce your spending as quickly as possible;
  3. determine and utilize all sources of income and aid available to you.

Try to maintain at least three months' worth of living expenses in your emergency reserve fund. If you need to dip into these funds, that's OK. That's why they're there. Once you get back to work, you'll have a chance to rebuild your funds and get yourself back on track.

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