I was about to pay my credit card bill when I glanced at my account balance and felt a tiny but noticeable twinge.
“Ouch – is this really all I got left in my bank account? The balance is getting much lower than I would like it to be, while not much money has come in so far from the business I started recently.” I paid the credit card bill and tried to ignore it for the rest of the day.
This is a scenario you might encounter once you’ve quit your job without another one lined up.
I wouldn’t recommend anyone to just quit their job without having another income source prepared.
In some circumstances, and under certain conditions, it can be the right decision, but you need to run it through your mind at least a couple of times to make sure you’re ready to take the risk.
But let’s just assume that you’ve decided to quit your job within the next 1-2 years and are not planning to look for another one right after that. You might plan to either start your own business, work freelance, or do a mini-retirement first and then figure everything out.
How can you prepare your financial situation before you quit in a way, so that once you quit you are in the best financial position to make the most out of your newfound freedom?
Note here that I am not talking about FIRE, or ‘financial independence retire early’. People who have achieved FIRE have accumulated enough savings and investment that keep on growing and generating enough income that they never need to work again and work becomes optional.
I am talking about people who have a considerable amount of money saved up to cover their living expenses for the next 6-24 months, and are thinking hard of whether or not they’re ready to quit their job and pursue their own thing.
Having enough money saved up before quitting without another job lined up is crucial, but it’s not the only thing to think about. In any case, we’ll get to this one too and talk about how much money you need.
Here are a few ways you can prepare yourself better financially before resigning:
- Downsize before your quit
Once you leave your job, you will likely need to live more frugally. Every dollar is precious and buys you more time to work on your own thing.
The sooner you downsize your living standard, and reverse lifestyle inflation, the sooner you’ll be prepared for your next phase.
If right now you’re earning a considerably high income, you might be living in a two-bedroom apartment on your own, or a luxurious one-bedroom condo, driving an expensive car, spending quite some money on fine dining, and shopping at the mall every weekend.
Once you resign, you know that you can’t continue living like that any longer, unless you want to go back to your job. You will need to downgrade your lifestyle, and it can feel like experiencing withdrawal. It can be a not-so-nice feeling because it seems that you are forced to do so by your circumstances.
On the other hand, if you proactively downgrade your lifestyle before you quit, it will feel more like a conscious choice you made so that you can leave your job and pursue what is meaningful to you.
So get rid of that expensive car, and move to a smaller apartment in a less expensive area.
2. Draw up a new budget and implement it
Similar here, by adapting to a new, tighter budget, before you resign, you’ll get off to a better start.
If you don’t have a budget yet, start by writing down your current expenses, by category, including
- Accommodation
- Transportation
- Groceries
- Eating out
- Entertainment
- Communication (cell phone, internet)
- Gifting (birthday presents, donations)
- Clothing
- Electronics
- Travel
Then, start drafting a target budget, which is the budget that you will use going forward. Reduce each category so you get to the budget you want. Think in detail about how it will change where you live, what food you buy, how often you shop, where you travel to.
There are two ways to do this.
You can start with how much money you will have saved up by the time you quit your job, divided by the number of months you plan not to be working. This will be the monthly budget you have to work with.
Or, you can do it the other way around. You adjust your budget first, and then calculate you many months that will last you, or how much more you will need to save up.
In any case, your new budget will likely be much lower.
Start implementing this new budget as soon as you can, for two reasons.
Reason number 1 is that you will transition more easily into your next life phase.
Reason number 2 is that you can start testing this budget to see if it’s realistic or not.
Before I quit my job I drafted a target budget but didn’t implement it until after resigning. One reason was that I moved countries, so I wasn’t able to test it first. It turned out that I had underestimated my actual expenses by quite a lot so that my savings dwindled faster than expected.
3. Make use of your insurance benefits
I want to emphasize one thing: No matter what, you need some kind of health insurance after you quit. Don’t ever let one day pass by without health insurance.
Although you’ve always been healthy and safe until now, no one can predict the future. In the rare event that something unexpected happens, even through no fault of your own, it can set you back thousands or ten thousand dollars, and completely ruin your plans.
That being said, the insurance you purchase on your own after you resign may not match the insurance that was provided by your company. The coverage may be lower, and the co-payment may be higher.
That is why you should maximize the usage of any benefits that you have while you are still employed.
I made this mistake, and still regret it until now, even if just a bit. The bank I worked at provided me with a very decent insurance package which included dental and optical benefits.
I had dental work to be done that was overdue, which I postponed for a while because I was working so much. The last thing I wanted to do on a weekend was to spend my time at the dentist. And taking a day off to go to the dentist was out of the question. I was also a glasses and contact-lense wearer.
So for many reasons, I didn’t make use of these benefits. Once I quit, I had the time to take care of my teeth and to go get my eyes checked, but then, I had no proper insurance.
So while you still have those awesome benefits, go to the dentist and get those cavities filled, those teeth cleaned. Get yourself an eye exam and new glasses. Even get yourself a few massages if that’s covered as well.
4. Ask for more money
If your planned resignation is more than 6 months from now, it’s worth asking for a raise.
Chances are, that you are not paid what your work is worth and that you are lagging behind several rounds of pay increases.
A reason that many people are reluctant to ask for a raise is that they feel insecure about their contribution, afraid how asking for a raise might reflect on them, and just feel awkward about asking for more money.
Now that you’ve decided that you want to quit your job anyway, you don’t have to worry about these reasons anymore. I mean, you should never have worried about these things anyway, but now you have an even weaker case.
Let’s say you ask for a raise and your salary increases from $ 65,000 to $72,000 annually. If you stay in your job for another year, that means an additional $7,000. It might not seem like a whole lot of money to you right now, but trust me, once you leave your job you will have a totally different sense of money.
5. Communicate your high-level plan to people close to you
You don’t need to go into too many details, but don’t make a big surprise out of it either.
It’s a good idea to start communicating your plans to people close to you, early on. That includes your parents, siblings, and close friends.
Your family and close friends play a big role in your ability to stick to your new budget, as we discussed in point 2.
Our habits are highly interdependent with those of people close to us. You might go on trips with your family members and buy them and their kids expensive Christmas and birthday gifts. You might regularly go out with your friends and eat expensive brunches. You might go shopping with them once a month or queue up for the new iPhone together.
Once you quit your job, you may no longer be able to keep up with those spending habits. If you have really good relationships and can always communicate openly and honestly with the people close to you, it may be no challenge for you to say ‘sorry, no Christmas presents this year’, or ‘I will not be able to join the weekly brunches anymore, but you’re welcome to drop by at my place to have coffee’.
But if your current communication patterns do not reflect this, it might be difficult and feel awkward for you to explain this in detail.
One way to keep your close ones in the loop on the changes and stick to your budget is to simply communicate your plans early on.
Just tell them casually that you’re planning to resign soon so that you can pursue something important to you, and that you’ll have no income for some time and need to dial down your spending.
Unless they are completely disconnected and unempathetic people, they will likely get it and completely understand if the next birthday gift is a hand-drawn card instead of the latest gadget.
6. Calculate your project budget
This is different than the monthly budget we talked about earlier. Your monthly budget consists of your recurring expenses which are more or less the same each month. At least that is the way I like to do it.
For example, your monthly budget might be $2,600. This includes all the things you need to buy and pay for regularly and there is little fluctuation to it.
But then, there’s what I call ‘special expenses’. These include irregular items, such as traveling, buying new furniture or a bicycle, paying for a course, renovating your bathroom, etc.
You need to calculate these as precisely as possible.
While you are still working full-time, you can afford to be less precise, as you can always roll over expenses to the next months. In the worst case, you put it on your credit card and pay it off gradually.
But when you don’t have a steady income coming in, spending an unexpected $1,600 on a new computer will make you go ‘ouch’.
To avoid this, this is what you need to do:
Imagine that the next phase of your life is a project. Define a time limit for it, e.g. 3 years. You might work on your new business during this time, or transition into making a full-time income through freelancing. It might be a mini-retirement that goes on for a few years, combining hobbies, learning, taking care of kids.
Whatever it is that you plan to do, try to define the scope. Let’s just say it’s 3 years. For those 3 years, note down as detailed as possible what you are planning to do and achieve in terms of your career as well as finances.
When will your business start to generate income, and how much? When will you start having enough clients that you can earn a full-time income? At what point might you decide to go back to a job or a part-time job?
Then, calculate realistic expenses. This means, that you need to budget for your co-payment when going to the dentist. The 2 wedding gifts you’ll buy.
Also, don’t forget the money you need to grow your business and yourself. This is especially important if you’re leaving your job to start a business.
One of the worst things that can happen is if you don’t have enough money prepared to learn the things you need to advance, and to invest in things to grow your business.
Let’s say that you’ve started a coaching business. You want to start a professional website. But you haven’t accounted for the cost, so you end up using a website without a dedicated domain.
This was one of the mistakes I made. When I started my first business, I didn’t calculate the true costs of running a business, so I skimped on a lot. I ended up thwarting my own growth.
Add up all these costs, and don’t fool yourself.
Rather than just calculating a monthly budget, come up with a project budget for that defined time and scope.
7. Save up more
While you’re still earning a steady income, try to save up as much as possible.
Think of it this way: No matter how meticulously you planned your post-resignation budget, it will be at least 50% more. Unless you’ve tested your new budget and have been implementing it for at least a year.
This applies to budget as well as time, for most projects. Things always tend to take longer and cost longer.
So save up more. If currently, you’re saving 30% of your income, try to save up 40% of it, and 50% of it next month. You can’t imagine how valuable every extra dollar will be after you’ve resigned.
Now that we talked about the preparation phase, in the next post coming up soon I’ll share with you how I made things work out financially after I resigned.
