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 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 the milestone, you run the danger of prolonging your break and getting adamant about something that isn’t working.
Second, a break needs a corpus to support it. But that need not always be large. If you have large and critical financial goals, you want to provide for those. A large financial goal is one that needs funding that is bigger than your regular and routine income; it is critical if it must be funded. 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. Sell that third flat in the suburbs but don’t liquidate all assets into cash sloshing in the bank.
Third, 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. You want to cover the mandatory expense for sure. 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 that monthly amount that will keep you comfortable and not anxious about routine expenses. It is adequate to provide for that.
Fourth, if your break involves new expenses, make sure you have included them in your estimates. A friend wanted to pursue a career in modeling and gave up her full time bank job. She was soon exasperated with the amount of money she had to spend on clothes, accessories, beauty treatments and gym routines. Cutting corners hurt her prospects from her and spending too much from her left her anxious. New business creators 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.
Fifth, 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.
Sixth, be careful while front-ending large expenses. I have met many retirees who 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 realize 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. Estimate realistically. Invest to provide the income that keeps you healthy and then see if there is a surplus to indulge.
Seventh, make sure that 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 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.
Eighth, list and rank your assets. These are the ones you will turn to if your plan faces risks 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—you don’t want to discover that your estranged husband is a joint holder. 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.
Ninth, 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. Sometimes you need a nudge to act.
Tenth, 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 your selves 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. Be in charge, always.
The author is Chairperson, Center for Investment Education and Learning.)