10 personal finance rules to follow if you’re taking a sabbatical from work
First, set the break as firmly as possible. The reason you need time off in the first place will determine that. If you’re thinking of studying for a competition and you can’t do it with a full-time job, give yourself a number of tries to make it happen. If you are planning to start a business venture, define the time period in which you hope to see profits. If you change jobs, define how long you will be without income. Without the milestone, you run the risk of prolonging your break and being inflexible about something that doesn’t work.
Second, a break needs a corpus to support it. But that doesn’t always have to be important. If you have important and critical financial goals, you want to fill them. A large financial goal is one that requires more funding than your regular, routine income; it is essential if it is to be funded. You can forego the annual vacation, but you may still want to send your child to a school of your choice. A goal can be funded by an asset, as long as you are able and willing to liquidate it. Sell that third apartment in the suburbs but don’t liquidate all the cash assets in the bank.
Third, you don’t have to replace your current income when you’re on break. Your income generally funds your mandatory and discretionary expenses and leaves a surplus for savings. You don’t need everything when you’re on break. You want to cover mandatory expenses for sure. Keep a smaller amount for discretionary spending and ditch the savings routine. You can come back to all of that when you start a new career. Estimate this monthly amount that will allow you to stay comfortable and not worry about routine expenses. Just provide it.
Fourth, if your break involves new expenses, make sure you have them included in your estimates. A friend wanted to pursue a career in modeling and gave up her full-time job at the bank. She soon became exasperated with the amount of money she had to spend on clothes, accessories, beauty treatments and gym routines. Taking shortcuts hurt her prospects and spending too much made her anxious. New entrepreneurs find themselves running out of working capital sooner than they imagined. Your break needs a business plan like preparation, don’t change it lightly.
Fifth, do not bet on risky assets with the corpus you have created for your new business. Worse still, don’t lock him into land or property. The money you have estimated and set aside should ideally be in a balanced portfolio of stocks and debt. Sufficient debt to support your regular income needs; own funds to grow the corpus so that funds you don’t use immediately can grow in value. Trading derivatives and buying lottery tickets will not make you rich.
Sixth, be careful when incurring large expenses. I have met many retirees who rejoice in their large corpus and spend the first years lavishly. They assume a second career can wait while they enjoy the fruits of their many years of hard work. By the time they realize they need to work again, a good portion of their corpus is spent on home renovations, gifts and donations to children and grandchildren, and spent on travel. Make a realistic estimate. Invest to provide the income to keep you sane, then see if there’s a surplus to spend.
Seventh, make sure the basics are in place. It’s a bad idea to take a break when there are outstanding loans. Remember that your estimated mandatory expenses must include any IMEs you still have to pay. It can be a burden. If you can’t pay your credit card in full each month, stop using them. If you have to borrow, rely on your loved ones to make your repayment terms more flexible. Beware of losing relationships if you fail to pay them. Make sure you are fully insured for life and health.
Eighth, list and rank your strengths. They’re the ones you’ll turn to if your plan faces risks you didn’t anticipate. Don’t pledge or mortgage your assets unless you see a stream of income coming in the near future to pay off the loan and recover the asset. Make sure you know what assets you want to liquidate to fund your breakup. Keep the paperwork in order – you don’t want to find out your ex-husband is a co-owner. Liquidity is the only characteristic that your assets must have. The classic definition of liquidity is the instantaneous conversion into cash at fair value and at zero cost. You may not achieve this excellence, but make sure your assets are close enough.
Ninth, work with a trusted partner who knows your plan and will guide you. Not having an income can create anxieties that are difficult to manage. You will fall into the trap of denial if you face it alone. A spouse, relative, friend – someone who knows you well enough to hold the mirror in front of your face as you slip – should be available to guide and guide you. Many financial mistakes are avoided when another independent voice tells you about the risks you are overlooking. Sometimes you need a helping hand.
Tenth, make sure you know you’ve made the decision to take a break and that you’ll live with the consequences. You won’t complain and blame, consider yourself unlucky, or imagine the world is pitted against you. You will define in advance as well as possible and manage as you go, and expect to work within a set timeframe. Your finances should support you and your family while you allow yourself this advantage of time. Be in charge, always.
The author is president of the Center for Investment Education and Learning.)