Financial Planning For Career Break: Top 5 Steps To Know

Taking time off from your flourishing career may appear easy-peasy, but it is more challenging than you think. If you ignore the aspects of efficient financial planning for career break, you may end up in a complete financial disaster.

Financial planning for career break begins as soon as you decide a cooling period is needed for your situation. If you’ve come here looking for answers, you’re probably torn between a yes and a no. We understand your predicament completely.

Anything can be a potential trigger to taking a career break. From excessive burnout, and re-energizing yourself to family health issues or your own. Preparing for the “no pay” situation with financial planning for career break is more important than thinking about the underlying causes.

 It can be painful imagining a day with all bills piling up and EMIs bouncing back. So, should you take a step back? No! Strategic financial planning for career break can help you live despite no-pay days. So, how do you manage such a financial plan?

Let us first focus on how you can prepare and change your lifestyle habits

• Determine the length of your career break in advance: Determine how long your career break will be. Once you understand the time frame, for instance between 6 months and a year you can begin financial planning for career break. You can easily justify this time off in your resume and consider financial planning as well.

• Start practicing a frugal lifestyle: It is not ideal if you suddenly realize you can’t afford a luxurious hotel stay on vacation or frequent lavish dinners with your family. So, the best thing to do is to develop a simpler lifestyle before you go on your time off. An effective tool for financial planning for career break—avoid impulsive purchases. Let your favorites stay on the shopping list for a month. If you still need it after a month, go buy it; otherwise, you didn’t need it. Practice living simply before taking a career break to manage your finances effectively.

• Explore Work From Home Opportunities: You must accept that taking a career break invites new spending. Unlock plenty of earning potential like freelancing, online teaching, consultancy opportunities, and other such gigs. It lets you make better use of your time while honing your experience and expertise.

Now that you’ve addressed the changes you should make to your lifestyle or habits.

Let’s understand the five steps of financial planning for career break

Split your expenses into two separate categories: The first step of financial planning for career break is splitting your expenses into – mandatory and non-mandatory. Mandatory expenses include your life/vehicle insurance, medical insurance, house rent, electricity, and so on. Non-Mandatory expenses are like include groceries, mobile/internet recharge, vacation trips, apparel, and so on. Switch to cost-effective deals to reduce your discretionary spending.

Create an Emergency Fund: The second step of financial planning for career break is being ready for uncertainties and planning your emergency funds. Whether there are COVID-like lockdowns, travel restrictions, hiring freezes, layoffs, and other factors financial planning for emergency funds is a must. An emergency fund is the sum of at least 6 months of expenses. If you can accumulate a larger emergency fund, nothing like it.

Repay all your liabilities: The Third step of financial planning for career break is repaying your loans. Try repaying all of your liabilities before you begin your sabbatical. If the outstanding loan amount is too large, direct all of your surplus toward pre-paying your loan installments. When you pay off a significant amount, you can request for loan EMIs to be rescheduled to reduce your financial burden.

Maintain separate savings accounts for living expenses: The fourth step of financial planning for career break is maintaining separate savings accounts. Keep at least three to six months of living expenses in a separate account to ensure you are adequately covered during your no-income career break. You can open a zero minimum balance or a low minimum balance account for this purpose.

Creating a cushion for regular expenses: The fifth step of financial planning for career break is creating a financial cushion for expenses. If you intend to take a long career break, consider establishing a regular source of income. This may not be enough to cover your pre-sabbatical lifestyle, but it will wrap many unforeseen expenses

 Financial Planning for Career Break: How to Build Your Contingency Funds?

Starting early investing is the secret sauce to building a corpus to meet unexpected times. Let us assume –

Monthly Cash Flow (Rs.)	1,00,000/-
Mandatory expenses(monthly)	20,000/-
Career break Duration	6 months
Estimated monthly expenses	20,000/-
Emergency Funds ( 6 months expenses)	1,20,000
Living Expenses ( for 3 months)	60,000/-
Funds Required For Time-Off (incl Mandatory expenses, emergency funds, and Living Expenses)	3,00,000/-

To build the corpus by effectively using financial planning tools, you can consider the following investments

Invest in Equity: Investing in equity for the long term while you are working can help you build a cushion and also create an avenue for additional income in the form of dividends. Equity investments help you earn higher returns than traditional investments like fixed or recurring deposits. The returns on equity investments are often high despite adjusting for inflation.

Monthly income plans: Save for monthly expenses by investing in a monthly income insurance plan, a Post Office Monthly Income Scheme, or a Fixed Deposit with monthly interest payments. (If a 7% annual return is assumed, monthly income per lac is approximately Rs. 583.)

Systematic Investment Plans: Invest in a Systematic Investment Plan (SIP) to build a good corpus. If you invest 20% of your monthly income, i.e. 20,000/- in SIP for a year, and assume a 12% return, you can earn Rs. 2,56,187/-. Expecting 12% returns on investments in Hybrid/Balanced funds or large-cap funds that are more stable in market fluctuations is not unrealistic.

Key Takeaways

You can effortlessly steer through the no-income flow days with the right financial planning for a career break. Maintain your sabbatical plans on the back burner until you have enough funds to cover your mandatory expenses.

Plan your finances with a proper re-entry backup plan. If you want to start your own business, invest in learning the ins and outs of the industry.

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Read more:  How Long-term investing helps create life-changing wealth – TOI.