Summary of this article
Are you planning to quit your job? Ye yes, make sure you have enough savings to manage expenses until your next source of income kicks in.
Before putting in your papers, take a closer look at your savings, insurance, loans and tax commitments.
A break from work may be just what you need, but have you worked out how long your savings will last without a regular salary?
The decision to leave a job often comes after months of thought. You may be tired of the daily routine, keen to start something of your own, looking for a career change or simply wanting a break. Whatever the reason, there is one question worth answering before you put in your papers: how long can you manage without a monthly salary?
It is easy to underestimate the importance of a regular pay cheque until it stops arriving. Rent, EMIs, school fees, household bills and insurance premiums do not wait for you to find your next opportunity. Even if you have a decent amount in your bank account, it may not last as long as you expect.
This does not mean you should give up on the idea of quitting. It simply means that your finances need as much attention as your career plans. Here are some things to sort out before taking the final call.
Start By Calculating How Much You Need Every Month
Before looking at your savings, work out your monthly expenses. Go through your bank and credit card statements for the past six months. This will give you a better picture of where your money goes than relying on memory.
Financial planners suggest that salaried individuals include their home loan EMIs, rent, groceries, electricity bills, school fees, fuel, medicines, insurance premiums and other regular payments. They should also not leave out expenses that come once or twice a year, such as property tax, vehicle insurance, annual school charges and maintenance costs. Dividing these by 12 will help you arrive at a monthly figure.
Next, separate essential spending from expenses you can cut back on. Eating out, holidays, shopping and subscriptions may have to take a back seat for some time.
The exercise may reveal that your actual monthly requirement is considerably higher than you had assumed.
Keep Enough Money Aside For A Long Break
A person who quits with another job offer in hand is in a different position from someone who plans to take a six-month break or become self-employed.
If you do not have another source of income lined up, try to keep at least 9-12 months of essential expenses in reserve. Those moving into freelance work or starting a business may need a bigger cushion because earnings can be unpredictable in the initial months.
Suppose your essential household expenses come to Rs 80,000 a month. You would need around Rs 7.2 lakh for nine months and Rs 9.6 lakh for a year. This is over and above the money you may need to start a business, pay off loans or meet other planned expenses.
Keep this reserve in a savings account, sweep-in deposit or other relatively safe and accessible instruments. Avoid putting money meant for monthly expenses into equity funds or other investments that can fall in value just when you need to withdraw it.
Do Something About Expensive Loans
A monthly salary makes loan repayments easier to manage. Without it, even a modest EMI can become a source of worry.
Check your outstanding credit card dues and personal loans first. These generally carry higher interest rates and should be prioritised for repayment. If you have a home loan, calculate whether you can continue paying the EMI even if your income remains irregular for several months.
There is no need to use up your entire savings to close every loan before resigning. In fact, doing so could leave you short of cash. The idea is to reduce costly debt while keeping enough money readily available.
Do Not Lose Sight Of Health Insurance
For many salaried employees, health insurance is something they receive through their employer and rarely think about until a medical emergency occurs. Once you leave the organisation, the group cover may no longer be available.
Check when your employer-sponsored policy ends and whether it offers a migration option. If you need an individual or family floater policy, arrange it before leaving employment. Remember that age, existing medical conditions, waiting periods and exclusions can affect the terms of a new policy.
Also review your term insurance. If your spouse, children or parents depend on your income, the need for life cover does not disappear when you quit your job.
Check What Your Employer Owes You
Before your last working day, get a clear picture of your full-and-final settlement. This could include pending salary, leave encashment, incentives, bonus and gratuity, wherever applicable.
Your EPF balance also deserves attention. Do not treat it as money available for spending during your break. It is part of your retirement savings. Understand the rules for continuing, transferring or withdrawing the balance and the tax consequences before making a decision.
Prepare For Taxes And Retirement Contributions
Once you leave a salaried job, tax matters may not remain as straightforward as before. If you take up assignments or work as a consultant, you will have to keep track of payments received and expenses incurred while doing the work. Also, set aside money for taxes instead of waiting until the end of the year.
A practical way to manage this is to move a portion of every professional payment into a separate account for taxes. That way, the money does not get mixed up with household spending.
Also review your SIPs, NPS contributions and other retirement investments. You may not be able to maintain the same monthly contributions immediately after quitting. It is better to adjust them to your available cash flow than to continue investing at the cost of borrowing money for routine expenses.
Have A Plan For Earning Again
Taking a break is one thing; being without an income for an indefinite period is another.
If you plan to freelance, think about how you will find clients, how much you can realistically earn and how long clients may take to pay. If you want to start a business, prepare a separate estimate of the initial investment, monthly running costs and the time it could take to generate revenue.
Do not base your calculations on your best-case earnings. Work out what happens if assignments are delayed, a client drops out or the business takes longer than expected to pick up.
A Resignation Should Not Become A Financial Emergency
There is nothing wrong with wanting to step away from a job. Sometimes a career change, a business idea or even a long break is worth pursuing. But it is important to know what you are getting into.
Before resigning, check how much money you have, how much you spend, what you owe and how long your savings can support you. If the numbers do not add up, consider delaying the decision by a few months and building a larger reserve.
A job can always be left. Rebuilding savings after an unplanned financial setback, however, can take considerably longer.
