First, define the break as firmly as you can. Why you need the time off in the first place will determine that. If you plan to study for a competitive exam and can’t do it in conjunction with a full-time job, give yourself a set number of tries to get it done. If you plan to start a trading company, define the period in which you expect to see profit. If you are changing jobs, define how long you will be without income. Without the milestone, you are in danger of prolonging your break and becoming adamant about something that isn’t working.
Second, a break needs a corpus to support it. But that doesn’t always have to be big. If you have big, critical financial goals, you’ll want to meet them. A great financial goal is one that needs funding greater than your regular, routine income; it is critical if it should be financed. You can eliminate annual vacations, but you may want to send your child to the school of your choice. A target can be financed with an asset, as long as it is able and willing to liquidate it. Sell that third flat in the suburbs, but don’t liquidate all the assets in cash by splashing around in the bank.
Third, you don’t have to replace your current income when you’re on a break. Your income generally funds your mandatory and discretionary expenses and leaves a surplus to save. You don’t need it all when you’re on a break. Surely you want to cover the mandatory expense. Keep a smaller amount for discretionary spending and get out of the savings rut. You can go back to everything when you start a new race. Calculate that monthly amount that will keep you comfortable and not anxious about routine expenses. It is appropriate to anticipate that.
Fourth, if your break involves new expenses, make sure you have included them in your estimates. A friend wanted to pursue a modeling career and quit her full-time banking job. She soon became exasperated with the amount of money she had to spend on clothes, accessories, beauty treatments, and gym routines. Cutting corners hurt her prospects and spending too much of hers left her anxious. New business creators find themselves running out of working capital sooner than they imagined. Your break needs a business plan as preparation, don’t change it.
Fifth, don’t bet on risky assets with the corpus you’ve built for your new business. Worse yet, don’t lock it on land or property. The money you estimated and set aside should ideally be in a balanced portfolio of equity and debt. Enough debt to support your need for regular income; capital to keep the corpus growing so that funds you don’t use right away can appreciate in value. Trading derivatives and buying lottery tickets will not make you rich.
Sixth, be careful when anticipating large expenses. I have met many retirees who rejoice in their large corpus and spend lavishly in the early years. They assume that a second career can wait while they enjoy the fruits of their many years of work. When they realize they need to get back to work, a good chunk of their corpus has gone to home renovations, gifts and donations to children and grandchildren, and has been spent on travel. Estimate realistically. Invest to provide the income that keeps you sane and then see if there is a surplus to enjoy.
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 estimate of mandatory expenses must include all the EMI that you have left to pay. That can be a burden. If you can’t pay your credit card in full each month, stop using it. If you must borrow, lean on friends and family to make your repayment terms more flexible. Be careful of losing relationships if you don’t pay for them. Make sure you are fully insured for life and health.
Eighth, list and classify your assets. These are the ones you’ll turn to if your plan faces risks you didn’t anticipate. Do not pledge or mortgage your assets unless you see an income stream in the near future to pay off the loan and claim the asset. Make sure you know what assets you want to liquidate to finance your break. Keep your paperwork in order – you don’t want to find out that your estranged spouse is a joint owner. Liquidity is the only trait your assets must have. The textbook definition of liquidity is instant conversion to cash at fair value and zero cost. You can’t reach that 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, a relative, a friend, someone who knows him well enough to hold the mirror up to his face when he slips up, should be available to guide and guide him. Many financial mistakes are prevented when another independent voice tells you about the risks you’re overlooking. Sometimes you need a push to act.
Tenth, make sure you know you made the decision to take a break and you will bear the consequences. They will not complain or blame, consider themselves unlucky or imagine that the world is against them. You’ll define ahead of time as best you can and manage as you go, expecting to work within a set schedule. Your finances must support you and your family while you give yourself this benefit of time. Be in charge, always.
The author is president of the Center for Investment Education and Learning.)