You must follow these five financial rules before leaving your job

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Before leaving your job, you should calculate your income and expenses.

Savings for six months’ expenses should be a minimum.

You should save, maybe consider a part-time job and stick to your budget.

Leaving a full-time job with no prospect of a new one can seem risky. But it can also be a positive step, as long as you are well financially prepared. If you are willing to do it yourself, there are a few important things that you should do first. Here are five steps to getting ready to leave your job.

1. Make a full inventory of your money

Before you leave your job, you should take a complete inventory of your finances. How much money did you save? What are your income and expenses? The results can help you determine if you are financially able to quit, or at least create a plan to help you reach your goal. Companies use cash flow equations to prepare for bad times and ensure that they have enough cash to cover business and other expenses. You can also use this formula to calculate how much money you have if you decide to leave your company.

You can get some certainty with this formula: Opening Inventory + Expected Income – Expected Expenses = Finishing Inventory Forecast

If you quit, you won’t get any income from your full-time job, but you may get some money from a part-time job, earnings, or other compensation. Let’s say you start with $5,000 in savings, anticipate $2,000 a month from your side hustle, and your monthly expenses are $3,000 a month.

The expected cash flow formula then will be:
5000 EUR + 2,000 EUR – 3000 EUR = 4000 EUR

In this scenario, you would lose about $1,000 in the first month alone. You should know where you need to adjust your spending, make some changes in your lifestyle, or improve your passive income strategy. You should also consider how much debt you have and what your monthly payments would be without your regular salary. Having a little debt isn’t a big deal at first. However, if you have a lot of debt, especially high-interest credit card debt, consider working part-time before leaving your job completely so you can pay off the debt.

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2. Set a budget – and stick to it

Without fixed salaries, you need to set a budget that fits your lifestyle and stick to it. According to financial planning expert Deborah L. Mayer, CEO of wealth management company WorthyNest, a spreadsheet is an easy way to track your spending. She breaks down her budget schedule into five main areas: income, required expenses, voluntary expenses, annual expenses, and surplus or savings.

Since you will be leaving your job, it is important to stay within your means. Start by adding income sources to create a basis for your budget. Subtract your base expenses (things you have to spend money on) and your discretionary expenses (things you are happy to spend money on). Don’t forget to subtract all annual expenses such as retirement contributions, auto insurance, and other expenses. The rest is the amount you can save. If you have nothing left, you should consider cutting some expenses or increasing your income.

3. Make saving a priority

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Saving is crucial, especially if you are planning to quit your job. You might think that you can postpone the topic of saving, but this is a mistake. Experts say an emergency fund is the first step to a sound financial plan. In the case of single-parent families, it must include at least six months’ expenses.

After creating your emergency fund, don’t touch it or put it into a high-yield savings account. Remember that your emergency fund should be available. Avoid using certificates of deposit (CD) or investing your emergency fund in assets, as this can make it difficult to access your money in the short term.

Short tip: A high-yield savings account is a great way to invest your savings because it is accessible and yields interest. Online savings accounts typically offer higher interest rates of around 0.3 percent to 0.5 percent annually at the time of writing.

You should also focus on saving for retirement. Experts say it’s best to save 10 to 15 percent of your income to ensure you save enough for retirement. But it’s better to save 1 percent each year than to wait until you’re comfortable with saving. Start small and watch your retirement fund grow over time.

4. Be ready to adapt to a new lifestyle

After cutting out some avoidable expenses and creating a retirement and savings plan that works for you, you may feel like you have very little money left for the finer things in life. Some of the ways you can adapt to your new work-free lifestyle include:

  • Shopping in stores at cheaper prices
  • Wait until there is a sale or discount before making any big purchases
  • Automate your savings, retirement, and bill payments so you can focus on other areas
  • Consider a smaller apartment
  • Find new activities that motivate you

5. Complement your lifestyle with other sources of income

Even if you’ve saved enough to comfortably quit your job, there are many reasons why you should add some revenue streams to your strategy. For example, alternative sources of income such as independent work or dividend investing can help add to your savings and grow your retirement funds.

Blogging or selling digital products are some examples of a side income that can help fill in the gaps even if you have enough money saved. Some experts say investing $100 regularly in a low-cost exchange-traded fund (ETF) or real estate investment fund (REIT) can help you grow your wealth and easily generate income through dividend payments.

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This text has been translated from the English by Lisa Ramos Dossey. You can find the original here.

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