Is Job Hopping Good or Bad Financially?

Is job hopping good or bad? It's a question many workers will be asking as the labor market improves and voluntarily leaving a position becomes a more viable option. From a monetary standpoint, the answer can be complicated.

A common assumption is that you can make more money by switching jobs than by staying at one. A new firm that values your skills may figure you'll only make the jump if it offers you a wage bump, for instance.

There's data that supports the idea that changing jobs can boost your earning power. The ADP Research Institute tracks the yearly wage growth of "switchers"—which it defines as workers who switched jobs from one month to the next—and of "holders," who stayed with the same job for at least a year. It found that year-over-year wage growth was higher for switchers in 21 of 24 months between January 2019 and December 2020.

For example, ADP found switchers experienced an average wage growth of 5% year-over-year in December 2020, while holders saw their wages grow 4%. The differences can be particularly stark on an industry level. In December, switchers in the resources and mining sector enjoyed a 13.9% earnings increase while the figure was 2.3% for holders.

Motivations for a move

To be sure, workers don't only depart posts for a higher salary, at least in the short term. In fact, Work Institute's 2020 Retention Report (PDF) found only nine out of 100 employees quit because of compensation and benefits.

In contrast, the report found 20 out of 100 employees left their roles for career development reasons. They may have felt they couldn't advance in their organizations, weren't gaining new skills or were in positions that didn't sync with their career paths. The report found work-life balance and manager behavior were two other top drivers for leaving jobs. Meanwhile, some people simply enjoy finding new challenges to face or are searching for the right cultural fit.

Potential downsides

If you're fond of changing jobs every few years, you should know it can make some hiring managers nervous. Onboarding a new employee can be costly, and companies may be hesitant to make the investment if they think you won't stay long.

Having a series of short tenures isn't a deal-breaker for a company—on the flip side, it could actually be seen as a bonus because of all the skills and networking contacts you've picked up along the way. However, you'll have some financial implications to work through.

For starters, you'll need to look at how a new total compensation package compares with your current one. Some factors to consider beyond the salary include bonuses, tuition reimbursement, commissions, child care benefits and employer contributions to insurance.

Also, consider whether your potential employer offers a tax-advantaged retirement account. If there's a plan, does the company contribute to it by matching a percentage of your own 401(k) contributions? How does that employer match compare with the one you may be receiving currently? You can use a simple 401(k) calculator to measure the impact of different retirement plans and employee contributions.

In addition, when can you start participating in the new plan? If the waiting period is longer than you're comfortable with, you may need to find other ways to save for retirement during that time, like through an individual retirement account, or IRA.

Lastly, consider what you may be forfeiting by leaving a position you haven't held very long. If you've been able to contribute to your 401(k) and your current company has a matching program, you may not actually own any or all of your employer's contributions until you've been employed there for a designated amount of time. Your current employer could have a vesting schedule that requires you to stay 3 years to get 100% of your match, for instance, or even just 40%. You'll be missing out on a retirement savings boost if you change jobs before being vested in your employer's match.

Staying loyal can be lucrative

If you're wondering if you should change jobs to get more money, consider whether it's possible to get a raise in your current role. A strengthening economy could give you more negotiating power to receive more money and additional responsibilities. You may regret switching for immediate growth if you really like where you work and it offers a steady promotion schedule and good benefits.

So, in the end, is job hopping good or bad? The answer depends on your personal needs and priorities, as well as the financial trade-offs involved. Considering all of these factors, both short-term and long-term, will help you make the best and most well-informed decision.