Whether you’re quitting your job to transition into a different career or simply want to start freelancing, the question is the same. “How much should I save before quitting my job?” The answer, however, depends on your personal situation and financial risk tolerance.
If you’re the breadwinner for your family, your savings cushion will have to be a bit more in comparison to a single person. Of course, the more money you have in the bank the smoother the transition will become, but there are other critical factors that come into play.
The time between your last paycheck at your day job and income from your new venture may take 30-45 days, especially if you’re a freelancer. It takes time to secure a new gig, sign a contract, perform the work, send an invoice and finally get paid.
One way to alleviate this pay gap is to request a deposit up-front for the work you do, but that’s not always possible depending on the industry or career path you’ve chosen. Make sure you have an additional bit of money saved up to cover one month worth of living expenses.
At the very minimum there should be at least $1,000 set aside. The funds should be easily accessible since they’ll be used as cash flow to get you to your next pay period.
On top of saving some extra money for the pay gap period, most financial experts will agree you should have at least 6 months’ worth of living expenses in the bank. You may be comfortable with having more or less money in a savings account, but this is the average amount you should have before quitting your job.
Set up a separate bank account in addition to your regular savings account. This one is only for emergencies and should not be touched except in the most necessary occasions. Make it a bit more difficult to access the funds versus your pay gap funds, so you’re not tempted to spend it.
If you do end up using some of this money during your transition, your next goal is to replace the savings so you always have a cushion of funds in the event you have an emergency or need to pay the bills.
If you find that you don’t have time to save up 6 months’ worth of expenses before quitting your job, the next best thing is to have a long-term contract or secure paycheck lined up. You still want a decent amount of money in savings to cover your basic needs for several months, but having a secure source of income will go a long way to easing your financial stress.
A long-term contract will also help you avoid taking on low paying jobs that only overwork you and cause too much anxiety during this transitional time.
Before quitting my job to go full-time freelance I didn’t have the chance to save up the entire $10,000 goal I set for myself since I had a family medical emergency come up. But I saved up $7,000 and replaced the $3,000 net income I was originally earning from my day job.
This allowed me to essentially reach my savings goal, while still earning enough money to cover all of my bills. It wasn’t an ideal situation, and I do wish I had saved a bit more, but I was still able to successfully save up about 3 months’ worth of expenses and quit my day job.
Be sure to look at all the facts and take into account your timeline and personal risk tolerance. You may not be as comfortable with quitting your job without a certain amount of money in the bank.
The bottom line is that you can calculate your bare minimum living costs and then multiply that times 6 to get the amount of money you should save before quitting your job.