Prepare Financially Before You Quit Your Job

By ketkih | September 25, 2015

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In today’s world of high salaries and even higher burnout rates, it is not uncommon to find people quitting a formal corporate job by the time they are 40 or 45. That is losing out on a potential 15 to 20 years of regular, reliable income.

Is this everyone’s cup of tea? May be, or may not be.

Is it financially possible for everyone to do this? In most cases, yes.

What to do when you want to quit your job

Take the case of Ranjan, a high flying corporate executive, who was earning more than Rs. 40 lakhs per annum. Ranjan was 48 years old when he decided to hang his boots and pursue his passion, painting, at a full time basis. He also planned to start a painting school and make it a profitable business.

But Ranjan did not just up and leave the corporate world one day. Planning all aspects of finances is extremely important before quitting your job and that is exactly what Ranjan did.

Here’s what Ranjan’s financial action plan comprised of:

Things To Do

Contingency corpus: One of the most important things to do before quitting a job is to ensure that there is a sufficient contingency corpus. This is because he will not be earning a regular income once he quits, but his expenses will remain the same.

Ranjan made sure that he had atleast 24 months’ worth expenses covered in the form of a contingency fund. He held these in savings accounts, short term deposits and liquid funds.

When Ranjan quits his job, he would lose out on the group health cover provided by his employer. Therefore, he bought a sufficient secondary health cover and term cover to protect his family. This should ideally be done before quitting the job.

Additional read: Money Management Case Study on Contingency Funds

Plan for the future: Ranjan was in his mid-career period when he planned to quit and therefore, had a sizeable savings corpus.

However, quitting his job meant losing out on a regular income. Hence, it became very important for him to plan for the future. Ranjan listed his critical goals and found out the shortfall in his corpus for each goal. As Ranjan had been a prudent individual, most of his goals were fairly well planned for.

He intended to fund the shortfall from his business earnings over the next 5 years.

Savings, investments and liabilities: Ranjan considered his savings and investments position. He had a healthy mix of investments, such as mutual funds, gold, equity mutual funds and bonds, in his portfolio.

He started planning to quit the corporate world from the age of 45. For 3 years Ranjan gradually moved his investments from risky assets to safer avenues. His portfolio, then, primarily comprised of investments which yielded a regular income in the form of an interest income or a dividend income.

Ranjan also had a second home from which he earned a monthly rent. As far as liabilities were concerned, Ranjan had paid off his personal loan, car loan and 90% of his home loan before quitting the job. It is important to have as few liabilities as possible on your books before you leave the job.

Things Not to Do

Quit on a whim: While it is easy to put down a list of things to be done, it is very important to concentrate on what should not be done when you leave a full time job.

Firstly, do not forget to plan well in advance and prepare yourself financially.

Secondly, do not leave your job if you feel that you don’t have sufficient savings to meet your critical goals. It does not make sense to dip into your long term savings or retirement corpus to fulfill these needs.

Thirdly, do not overshoot on your expenses. It’s always crucial to be prudent on how you spend. Avoid unnecessary expenses.

Also, do not hesitate to take the help of a professional to help you make the transition easily.

Take up new loans without planning for them: Upon quitting his job, Ranjan realised that he would also have to prepare and plan the finances of his proposed new business venture. He projected the cash flows, income and expenses of his business.

Ranjan decided to keep a track of all his business transactions, as his personal finances are directly linked to the business’ performance. He estimated that he would need to borrow for the new venture in order to grow the business and compared the offerings from various banks.

Leaving a secure and comfortable job which gives regular cash inflows is not easy, both for you and your family. It is not only a risky proposition, but also results in financial and emotional strain. However, being financially well prepared and planning for the situation well in advance can ease matters considerably.

 

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