Monday, March 14, 2011

using a budget to quit your job

This is the first in what hopefully becomes a series of "How To" posts.  These posts aren't intended to tell you how you should do something, though.  Rather, the intent is to show you how I did something, and explain what I would have done differently.  Because everyone's situation is different, all advice needs adjustment in order to work for you.  Especially unsolicited advice!

The most common reaction of other associates when they found out I was quitting was to say something like, "I wish I could quit too," so I thought I would write this.  My hope is that by showing how I did something, maybe the next person will realize it actually is possible.  I was able to quit my job not because Kathy made boatloads of money or because I have a trust fund or because I have no obligations.  I was able to quit my job because I thought, planned, made sacrifices, and had some good luck. 

One caveat -- this plan assumes a dual income or that you will still have money coming in from somewhere.  This budgeting plan will work if you are going to take severance, if you are going to take a lower paying job, or if you are going from being a two-income family to a one-income family.  If you're going to live off your savings for a lengthy period of time, obviously you will need to save for much longer.  But I think the basics remain the same -- you just need to stretch it out over a year, two years, or three years, and be willing to watch your hard-earned savings gradually dwindle.

Because I have actually learned something from my last two months of budgeting, this is part "what I did" and part "what I would have done in a perfect world."  That means it's on a 6-month timeline, which is how I would have done things in an ideal world, and if my firm had not offered severance when it did.  Because I had to quit when I did in order to get the severance, my timeline was actually much more condensed than this.**  But before we go to the step-by-step, can I just say this:  DON'T BE INTIMIDATED BY USING A BUDGET.  It is not hard or scary.  Even if you are not mathematically inclined.  You can use a calculator, this isn't high school algebra class.

**Since I am a lawyer, after all, please be aware I have absolutely no training in financial planning or anything like that. I am just a person who likes to be reasonably responsible with money, and recently found a way to save enough to quit my job.  So this is not intended to be financial advice.  K, thanks.


Step 1.  Make a budget, any budget.
Timing:  6 months before you plan to quit.

This is what I did in late December/early January.  The goal when I originally made this was to save aggressively, but it ended up not really working that way because it was so rough.  We actually had pretty much no idea what we spent on anything except the mortgage.  But you have to start somewhere, even if making this rough budget causes you to query, "Wait, those are all of my set expenses?  What happens to all my money, then?"  This question will be answered by Step 2, but for now, I'm going to tell you in 75 words or less how to make a budget:

First, write down all your mandatory or fixed expenses (rent/mortgage, student loans, utilities, parking, etc.) that you can't really cut.  Then figure out what's left of your monthly salary.  Take a guess at how much you can put into savings, and subtract that out.  Allocate what's left to stuff that fluctuates a lot or is a luxury (gas for the car, eating at restaurants, groceries). 

There.  Rough budget, done.  Not so hard, is it? 

Step 2.  Track expenses on your rough budget.
Timing:  4-6 months before you plan to quit.

Tracking your expenses is insanely useful. It's truly the only way to figure out where your money is going.  Even if you look back over your checking account statement at the end of the month, you see a lot of crap that was $10-$15 and no idea how things are adding up.  If nothing else, it makes you aware of how you're spending your money, so you can decide next time if you wouldn't rather spend it on something else.  Maybe you will even find that just the act of writing it down makes you spend differently (it did for us).   And the tracking will enable Step 3.

Step 3.  Make a more realistic budget that essentially reflects your actual expenses and is not overly aggressive.
Timing:  4ish months before you plan to quit.

I learned this the hard way shortly after college:  Budgets are like diets.  You need to find a way to eat healthfully, and sometimes choose salad instead of french fries in the interest of trying to eat 5 vegetables a day.  If you try to starve yourself, you're definitely eating a whole pan of brownies later.  Not that I have ever done that or anything.  Likewise, when you're making a budget, you need to make a budget that is maybe a bit more restrictive than you would be if you were just trip-trapping along not paying attention, but not one that is so strict you feel like you are deprived all the time.  And be honest about who you are.  Kathy and I absolutely love going out to the bar for beer with our friends (or just each other).  If we tried to restrict that to $20 a month, we would just constantly blow it.  But yeah, maybe we can go a little bit less. 

Here's the kicker.  You're trying to quit your job, not just get control of your finances.  That means you need to save.  And, as the conventional wisdom goes, you need to pay yourself first.  That means put that savings on direct debit, baby.  It's a non-negotiable expense.  We didn't actually have time to get to this step, because all of a sudden I was quitting and we were on Step 6.  But in a perfect world, we would have tried to save at least 10% of our salaries (AFTER deducting for our 401(k)s -- that's retirement money, not job-quitting money) for at least 4 months.  That would give us a comfortable emergency cushion in case I quit my job and one week later the basement floods or the furnace breaks (don't worry, both of those things happened in the last month, so I'm not jinxing us or anything).

Step 4.  Save, and live by your budget.
Timing:  2-4 months before you plan to quit.

10% at least, more if you can.  The savings is dual-purpose.  One, it gets you used to living on a smaller amount of money than you have been.  It makes the lifestyle adjustment more gradual.  But, as mentioned above, it also gives you a cushion for when you quit.  And it shows you whether your budget is actually realistic and where there is room for cutting.

Step 5.  Cut.
Timing:  1-2 months before you plan to quit.

Figure out the difference in your total monthly income before and after you quit.  Let's say it's $2,000 a month.  That's how much you need to cut.  There are two types of cuts here.  First, take a hard look at your budget and decide which expenses will go down just by quitting.  This means you need to challenge some of the assumptions you made in creating the budget. 

For example, Kathy and I determined ages ago that, because we come into NYC from the burbs together, driving and paying for tolls and a garage is almost equivalent to taking the train.  That's because taking the train would require us to take a cab to the train station in the suburbs (a per-person expense), pay for two train tickets, and (because we are always running late) pay for a cab in the city ($5-10 depending on traffic).  Then we need to repeat all those expenses on the way home.  The added flexibility of driving rather than being tied to the train schedule made a certain amount of additional expense worth it.  At first glance, the commuting costs wouldn't change when I quit, because she would still be driving in, garaging the car, etc.  But then we re-thought it, and realized that because I quit, all of a sudden it's only one train ticket, and no cabs on the suburb end because I can drive Kathy to and from the train station.  So our commuting cost just got cut in half because Kathy will be taking the train alone instead of carpooling with me.  Although she will be much sadder because I won't be there to entertain her with coffee and road rage each morning and evening.

Anyway, figure out how much your expenses will go down because you quit (think about work lunches, clothes specific to your job, tolls, gas, coffee breaks, dry cleaning, child care, etc.).  Let's say it's $500 a month.  Subtract that from the total amount you need to cut.   So in our example, it's $2,000 - $500.  That means you need to make $1,500 worth of additional cuts.

Before you make what I call "painful cuts," first see what you can push out or defer.  I discovered that I had enough in my savings to pay off a credit card I made monthly payments on.  We decided that was a better use of the money, rather than having the cash sit there as a cushion.  I also discovered I could switch to a less aggressive student loan repayment plan and save some that way.  In our make-believe world, let's say that paying off or pushing out debt saves you an extra $400 a month.  Now we only have to make $1,100 of painful cuts, instead of $1,500.

These cuts are painful because you have to actually change your lifestyle to implement them.  Here is one of ours:  Kathy and I had been planning on taking a certain number of vacations next year.  We realized that for one of our "vacations," we are either going to have to stay home or do something really, really cheap.  That was a painful cut, but now we don't need to set aside as much savings for vacations each month.  And we are grateful -- it's not like we have to forgo vacations all together.  We also changed our insurance coverage to drop our payments just a smidge, changed our cell phone plans, reduced our grocery budget, and are going to be even crazier than usual about saving electricity, reusing plastic baggies, etc.  We also pretty much have no clothing budget AT ALL and have to pull any medical expenses out of our "spending" money. Woo hoo, a co-pay instead of a dinner out!  We are also well aware that I will be DIY-ing a lot of stuff we would have formerly called in a professional for.  Like snaking the drain in our shower.  Fun times.

Now, the reason you want to separate these cuts into categories is because you want to try to implement the painful cuts a couple months before you quit your job, if at all possible.  That way, if cost cutting misery > job-related misery, you can change your mind.  You have not risked anything, and you have some extra savings in the bank. 

Step 6.  Quit, and make final adjustments.

After you quit, implement all the debt-pushing and job-related cuts.  Give notice at the parking garage, fire the cleaning lady, cook the rice and beans, and roll up your sleeves to snake the drain.  And smile, because you don't have to go to work today.

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