5 steps to financially prepare for quitting your job
Make sure you have a clear understanding of your monthly expenses and save a minimum of six month's worth to be safe.
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- Having a full and realistic estimate of your monthly expenses is key before quitting a job.
- Saving enough to cover six month's worth of expenses should be a bare minimum.
- Make saving a priority, consider starting a side hustle, and stick to your budget for best results.
- Read more stories from Personal Finance Insider.
Qutting a full-time job without having another one lined up may seem like a risky thing to do. But it can also be a positive move, as long as you're financially prepared.
Americans have resigned in record numbers during the COVID-19 pandemic amid a shift in many people's attitudes about their jobs and work in general. While some left to take full-time jobs elsewhere, others decided to step away from the 9-to-5 workforce altogether, at least temporarily. If you're so inclined yourself, there are some key things you should do first.
5 money steps to prepare to quit your job
1. Take a full inventory of your finances
Before you walk away from your job, take full stock of your finances. How much money do you have saved? What are your fixed, variable, periodic, and discretionary expenses? The answers will help you determine whether you are in a financial position to quit, or at least provide you with a roadmap to help get you there.
Businesses use cash flow formulas to prepare for slow seasons and ensure there is enough money on hand for business costs and other spending. You can also use one to determine how much cash you'll have on hand in the event you do decide to quit.
Forecast your cash flow over a period of time using the following formula:
Beginning cash + expected income - expected outflow = ending cash forecast
If you quit, you won't have income from your 9-to-5 job, but maybe you'll have some money from a side hustle, dividends, or other forms of payment. Let's say you start out with $5,000 in savings, expect to make $2,000 per month from your side hustles, and your monthly expenses total $3,000 per month.
Your projected cash flow formula would be:
$5,000 + $2,000 - $3,000 = $4,000
Under this scenario, you'd lose about $1,000 in only your first month. You'd need to figure out where you need to adjust your spending, make a few lifestyle changes, or increase your passive income strategy.
You should also consider the amount of debt you hold and what your monthly payments will look like moving forward without your regular paycheck. Having a little bit of debt is one thing. But if you have a lot, particularly high-interest credit card debt, you might consider moving to part-time, before quitting your job altogether until you get that debt paid down.
2. Create a budget — and stick to it
Without a steady paycheck, you'll need to create a budget that reflects your lifestyle and strictly follow it. According to financial planning expert Deborah L. Meyer, the chief executive officer of wealth management firm WorthyNest, using a spreadsheet to get a better perspective is a simple way to monitor your spending and keep track of where your money is going.
She divides her budgeting spreadsheet into five main areas: income, required expenses, discretionary expenses, annual expenses, and surplus or savings.
Since you will be quitting your job, it's crucial to stay within your means. Start by adding up your income streams to set a baseline for your budget. You already have this figure written down if you calculated your cash flow.
Subtract your required expenses (things you must spend money on) and discretionary expenses (things you like to spend money on). Don't forget to subtract any annual expenses like retirement contributions, car insurance payments, and other costs.
Whatever is left over is the amount that you can save. If you have nothing left or are in the red, consider shaving off some discretionary expenses or finding a way to increase your income.
3. Make saving a priority
Saving money is crucial, especially when you plan to quit your job. You may think that saving is something that you can put off, but that's where you're wrong.
CFP® professional Tanza Loudenback says creating an emergency fund is the No. 1 step to a sound financial plan. She suggests that single-earner households should have a minimum of six months worth of expenses saved.
After you've established your emergency fund, leave it alone or place it in a high-yield savings account. Keep in mind that you need your emergency fund to be accessible. Avoid certificates of deposit (CDs) or holding your emergency fund in investments, since they can make it difficult to access your funds on short notice.
You should also focus on saving for retirement. Experts say that the best way to ensure you are saving enough for retirement is to aim for 10% to 15% of your income. But it's better to save 1% every year than wait until you're comfortable saving more. Start small and watch your retirement fund grow over time.
4. Be ready to adjust to your new lifestyle
After cutting out some discretionary expenses and creating a retirement and savings plan that works for you, it may seem like there is very little cash left to spend on the finer things in life.
Some ways that you might adjust to your new jobless lifestyle include:
- Shopping in more reasonably priced stores
- Waiting to buy big-ticket items until there is a sale or discount event
- Automating your savings, retirement, and bill pay so that you can focus on other areas
- Considering downsizing your living space
- Finding new activities that keep you motivated
5. Supplement your lifestyle with other income streams
Even if you have saved enough to quit your job comfortably, there are many reasons why you might consider adding a few income streams to your strategy.
For one, having alternative income streams such as freelancing or dividend-paying investments can help boost your savings and increase your retirement fund. Another reason to start a side hustle after you leave your day job is to have some extra funds so that you can be a little more spontaneous and relaxed with your spending.
Blogging, dropshipping, selling digital products, freelancing, and peer-to-peer lending are a few examples of side income streams that can help fill the gaps even if you have enough cash saved up.
Some experts say that investing $100 periodically in a low-cost exchange-traded fund (ETF) or real estate investment trust (REIT) can help you grow your investments and generate income through dividend payments without putting in much effort.
The bottom line
People are quitting their jobs in record numbers amid the COVID-19 pandemic in a trend dubbed the Great Resignation. Before you join it, be sure you're ready.
Fully assessing your financial situation, establishing a realistic budget, and being ready to adapt to a new lifestyle are key elements of a smart financial plan for a post-resignation lifestyle.