5 Financial Number To Know BEFORE you quit your job

How I financially plan to quit my job?

A recent survey reported that financial mistakes cost Americans, on average, $1500 annually. So, if you are considering quitting your job, it’s even more important to get your finances so that you can make decisions informed by facts vs. guestimates mixed in with a lot of emotion.

But this can be overwhelming, but it doesn’t have to be. The goal is to have the numbers needed to help give you a clear picture of your finances so you can make informed decisions. 

The following are the five critical numbers to know to help you create a plan to quit:

• Average monthly spending

• Savings 

• Debt-to-income

• Net worth

• Credit Score

In the next few sections, we break down each number

Determine your average monthly spending

If you plan to quit your job and live off of your savings, you need to know your actually average monthly spending to accurately calculate how much savings you need to cover your expenses.

A big miscalculation of your average expenses means you may not have enough saved to cover your expenses. One unexpected expense can spiral you into thousands of dollars of debt or force you to take a job you don’t want. 

You can estimate your average monthly spending by doing the following:

• As a start, use last month's expenses. At least three months is good,  a year is even better. Most bank budgeting apps and non-bank budgeting apps make this process simple. 

• Account for irregular expenses like birthdays, holidays, etc. Average these numbers. For instance, if you spend $600 on birthdays, it’s $50 monthly. Add $50 a month to your average monthly spending as a birthday category

• Determine what expenses you will or will not keep when you quit

Next is to use this number to determine how much you’ll need to save to quit your job without jeopardizing your finances.

Create a savings plan

The biggest mistake I’ve seen people make when they save to quit is to plan for only the best, most disciplined version of themselves in the best-case scenario.  Estimates like these lead to people running out of money faster than they thought. 

As you’re planning, account for the different types  of savings you’ll need, such as:

• Enough funds to cover your living expenses when you anticipate not having an income.

• Short-term savings for upcoming and unexpected expenses- i.e., car repairs

• The funds to cover what you plan to do when you quit- funds for the first year of the business you want to start, travel expenses for your sabbatical

This is a basic rule of thumb, but you must decide how much money you’ll feel comfortable having to quit.

Review Your Debts

The amount of your non-mortgage debts can make or break your ability to quit. Estimating how much your debts will eat away at your future savings helps you quickly determine if debt must be paid off before quitting a job. 

Below are a few simple steps to review your debts:

• List your debts, balances, interest rates, minimum payments, and actual payments. 

• Total your payments and do the math to see how much of your paycheck is going toward debt. 

• Next is to ask yourself if you are comfortable having this much of the money you’ve saved to live off of going towards debt

• If not, create a plan to pay off the debt

Calculate Your Net Worth

Your net worth is simple to calculate. You take the value of:

• Everything you own 

• and subtracting it from the value of everything you owe. 

Ideally, you’d like that number to be positive. The higher the number is a sign of financial health and financial ability to manage the unexpected.

Your net worth will impact any financial decision you make. If you live off of your savings, your net worth will drop. This means a lower safety net if you have a major expense. 

Any debt you pay off increases your net worth, giving you more financial breathing room and peace of mind when making decisions.

As you contemplate financial decisions, like using savings or tapping into retirement accounts, review how those decisions impact your net worth and ask yourself if the decision is worth the impact on your overall net worth, future savings, or safety net.

Get your Credit Score

Your credit score affects so many areas of your finances. If you’re looking to get credit, it determines not only if you’ll be approved but also how much interest you’ll have to pay.

Employers and even some who hire contractors may look at your credit score because some employers worry that you may be at a higher risk of fraud or theft if you're in financial distress. 

Your credit score may be a factor if you need a loan to start a business.

Get specifically your FICO score. More than 90% of lenders use FICO so you want to use the score your potential lender is most likely to use.  

Review your credit report while you’re still employed and have income and time coming in to fix problems. 

To Recap

To make sure your plan to quit your job doesn’t turn into a future cautionary tale, a ton of debt or worse, another job you want to quit,  

The 5 Financial Numbers that you should know before quitting your job are:

• Your average monthly spending

• Total savings

• Debt-to-income

• Net Worth

• FICO Credit 

Next Steps

Take the following steps to figure out your numbers:

• Use your bank’s budgeting software to estimate your expenses simply

• Estimate how many months of expenses your savings can cover

• Do the following calculation to determine your non-mortgage after-tax debt-to-income percentage:  Total Debts/Total Monthly Take Home Income. Ideally, this number should be below 15%

• Estimate your net worth. You can get estimates of the value of homes on websites like Zillow, and you can get the values of vehicles on websites like Kelley Blue Book