How to align your personal finances when taking a career break

The reason for your taking time off in the first place will determine that. If you plan to study for a competitive exam and cannot do it along with a full time job, give yourself a set number of attempts to make it. If you plan to begin a business venture, define the period by which you hope to see profits. If you are switching jobs, define how long you will go without an income. Without this benchmark and a stipulated timeline, you risk prolonging your break and getting adamant about something that isn’t working out.

Even a small corpus is okay. If you have large and critical financial goals, obviously you need a bigger amount. A large financial goal, and a critical one, is one that needs funding that is bigger than your regular and routine income. You can drop the annual holiday but might still want to send your child to a school of choice. A goal can be funded by an asset, as long as you are able and willing to liquidate it. If you have an additional property than you can sell, do it but don’t liquidate all assets to just hoard cash in the bank.

You don’t have to replace your current income when you are on a break. Your income typically funds your mandatory and discretionary expenses and leaves a surplus for saving. You don’t need all of it when you are on a break. Keep a smaller amount for discretionary spending and give up the saving routine. You can go back to it all when you begin a new career. Estimate the monthly amount that will help you get by comfortably. It is adequate to provide for that.

If your break involves new spends, be sure to include them in your estimates. Novel business creators and entrepreneurs find themselves running out of working capital sooner than they had imagined. Your break needs a business plan-like prep, do not short change it.

Do not punt on risky assets with the corpus you have created for your new pursuit. Worse, don’t lock it into 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; equity to keep the corpus growing so that funds you don’t use immediately are able to appreciate in value. Trading in derivatives and buying lottery tickets won’t make you rich.

Many retirees rejoice in their large corpus and spend lavishly in the initial years. They presume a second career can wait while they enjoy the fruits of their many years of labour. By the time they realise that they need to be working again, a good part of their corpus has gone into home renovation, gifts and donations to children and grandchildren, and spent away in travel. Be careful while front-ending large expenses. Invest to provide the income that keeps you sane and then see if there is a surplus to indulge.

It is a bad idea to take a break when there are outstanding loans. Remember that your estimate of mandatory expenses must include all the EMIs that you still have to pay. That can be a burden. If you can’t pay your credit card in full every month, stop using them. If you must borrow, lean on friends and relatives so that your repayment terms are more flexible. Beware of losing the relationships if you default in paying them off. Make sure you are fully insured for life and health.

Your assets are what will safeguard you, should your financial planning face risks that you did not anticipate. Do not pledge or mortgage your assets, unless you see an income stream coming in the near future to repay the loan and reclaim the asset. Make sure you know which are the assets you want to liquidate to fund your break. Keep the paperwork in order too so that there is no room for rude shocks at this sensitive juncture. Liquidity is the one trait your assets must have. The textbook definition of liquidity is, instantaneous conversion to cash at fair value and zero cost. You can’t hit that excellence, but be sure that your assets are close enough.

Work with a trusted partner who knows your plan and will guide you along. Not having an income can create anxieties that are tough to deal with. You will fall into the trap of denial if you are dealing with it alone. A spouse, relative, friend—someone who knows you well enough to hold the mirror to your face when you are slipping— should be available to guide and steer you along. Many financial blunders are averted when another independent voice tells you about the risks you are overlooking.

Make sure you know that you made the decision to take a break and you will own up to the consequences. You won’t complain and blame, consider yourselves unlucky, or imagine that the world is set against you. You will define ahead as well as you can and manage as you go along, and hope to work within a set timeline. Your finances must support you and your family while you give yourself this benefit of time.