10 rules of personal finance that you must follow if you take a sabbatical from work

Taking a career break is so common these days. To break away from the past and move in a different path, one needs time to think through, plan and prepare. Many young mothers take a break from work to raise a child; some take a break to start an entrepreneurial project; some decide to slow down and pursue something completely different. How to adjust personal finances to support the break from work?

First, define the break as firmly as you can. Why you need time off in the first place will determine that. If you are planning to study for a competitive exam and can not pass it along with a full time job, then give yourself a set number of attempts to pass it. If you are planning to start a business, define the period within which you hope to see profits. If you change jobs, define how long you want to go without income. Without the milestone, you risk extending your break and getting steep on something that is not working.

Second, a break must have a corpus to support it. But it does not always have to be big. If you have big and critical financial goals, you will take care of them. A great financial goal is one that needs financing that is greater than your regular and routine income; it is crucial whether it should be funded. You can skip the annual vacation, but may still want to send your child to a school of your choice. A target can be funded by an asset as long as you are able and willing to liquidate it. Sell ​​the third apartment in the suburbs, but do not liquidate all assets to cash splashing in the bank.

Third, you do not have to replace your current income when you are on leave. Your income typically finances your mandatory and discretionary expenses and leaves a surplus for savings. You do not need it all when you are on break. You will definitely want to cover the mandatory expense. Keep a small amount for discretionary consumption and give up the savings routine. You can return to it all when you start a new career. Estimate the monthly amount that will keep you comfortable and not worry about routine expenses. It is sufficient to provide for it.

Fourth, if your break involves new expenses, be sure to include them in your estimates. A friend wanted to pursue a career as a model and gave up his full-time banking job. She quickly became annoyed with the amount she had to spend on clothes, accessories, beauty treatments and workout routines. Cutting corners hurt her prospects and spending too much made her anxious. New business creators find that they run out of working capital faster than they had imagined. Your break needs a business plan in preparation, do not change it.

Fifth, do not bet on risky assets with the corpus you have created for your new pursuit. Worse, do not lock it into land or property. The money you estimated and set aside should ideally be in a balanced portfolio of equity and debt. Debt enough to support your need for regular income; equity to keep the corpus growing so that the funds you do not spend right away can increase in value. Trading derivatives and buying lottery tickets will not make you rich.

Sixth, be careful while front-ending large expenses. I have met many retirees who welcome their large corps and spend lavishly in the early years. They suspect that a new career can wait while enjoying the fruits of their many years of work. When they realize they need to work again, a good portion of their corps has gone into home renovations, gifts and donations for children and grandchildren, and spent away on travel. Estimate realistically. Invest to provide the income that keeps you healthy, and then see if there is profit to be made.

Seventh, make sure the basics are in place. It is a bad idea to take a break when there are outstanding loans. Remember that your estimate of mandatory expenses should include all the EMIs that you still have to pay. It can be a burden. If you are unable to pay your credit card in full each month, stop using them. If you need to borrow, lean on friends and family so that your repayment terms are more flexible. Beware of losing the relationships if you do not pay them off. Make sure you are fully insured for life and health.

Eighth, list and rank your assets. These are the ones you will turn to if your plan faces risks you had not anticipated. Do not pledge or mortgage your assets unless you see an income stream coming in the near future to repay the loan and claim the asset back. Make sure you know what assets you want to liquidate to fund your break. Keep the paperwork in order – you will not find that your estranged husband is a co-owner. Liquidity is the property that your assets should have. The textbook’s definition of liquidity is, instant conversion to cash at fair value and zero cost. You can not hit that excellence, but make sure your assets are close enough.

Ninth, work with a trusted partner who knows your plan and will guide you further. Not having an income can create worries that are difficult to deal with. You will fall into the denial trap if you deal with it alone. A spouse, relative, friend – someone who knows you well enough to hold the mirror to your face when you slide – should be available to guide and guide you. Many financial blunders are averted when another independent voice tells you about the risks you overlook. Sometimes you need a push to act.

Tenthly, make sure you know that you have made the decision to take a break and you will face the consequences. You will not complain and blame yourself, consider yourself unlucky or imagine that the world is set against you. You will define forward as best you can, and steer as you go, hoping to work within a set timeline. Your finances should support you and your family while giving yourself this benefit of time. Always be responsible.

The author is chairman, Center for Investment Education and Learning.)

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