9 MIN READ
Have you ever dreamed of controlling your schedule? Do you feel chained by the 9-5 corporate structure? Are you considering making the leap to work for yourself?
I have led numerous clients through life planning exercises to help them articulate what their ideal life would look like if money wasn’t an obstacle. There has been one constant theme that every one of them seeks. The ability to control their time. This is something that I call Time wealth.
Time wealth is the ability to spend your precious time in a way that is most aligned with your values. Do you want to exercise in the middle of the day? Do you want to stop working when the kids are home from school? Do you want to work and live abroad for a few months? I certainly do.
I’d argue someone who controls their time is wealthier than someone who has a ton of money without any time to enjoy it.
The best way to improve your time wealth is to leave your 9-5 job and work for yourself. However, I know this is much easier said than done. Being your own boss comes with both emotional and financial challenges. I won’t go into the emotional challenges in this blog, but rather identify how proactive financial planning can help take the financial pressure off your shoulders while you identify how you can make this leap work for you.
I write this blog from the perspective of a financial planner, but also a business owner who made this leap from the 9-5 myself. Kaleigh (my wife) and I both started businesses from absolute scratch with a killer ~$800/month income after leaving our jobs (I taught one class at Boston University). We saw our savings go down each month, but we had the peace of mind that it was properly planned for.
Here are my top suggestions for you as you financially plan for breaking away from the 9-5 structure.
Manage Your Spending
The single most important variable (and the one you can best control) to make this career leap work is to better manage your spending.
The first part of managing your spending is to bring awareness to your current spending levels. Most people don’t track their spending because they view it as a punishment. I get it – it’s easier to shut your eyes and not see how much money you spend on Starbucks, eating out or whatever your guilty pleasure is.
But what if bringing awareness to your spending would put you in the best possible position to make this career leap work? When you have this motivation, it makes the act of tracking your spending much easier. You’re doing it for a purpose – to pursue work that you love and not feel chained by the corporate structure, which in turn frees you up to better control your time and live the life you’ve always dreamed of.
Once you know what you spend on average each month, you should take a good hard look at your spending and ask yourselves if there are areas in your budget that you could cut/change so that your spending is reduced. The lower your spending, the more time you give yourself and the higher the likelihood of making this dream work.
Now, this doesn’t mean cut everything and go live with your parents. Yes, there are fixed expenses that you can’t cut (diapers, food, mortgage/rent, etc.) but there are likely areas where you could spend less on while still enjoying the experience. For example, rather than going out to dinner with friends, go on a hike. Instead of traveling abroad (in a post-COVID world), rent a car and go explore some National Parks.
To Kaleigh’s dismay, we managed to cut our spending by roughly 40% when we both made the leap to start businesses from scratch. A big part of this was moving from the heart of Boston (we were a rock’s throw from Fenway Park which was amazing) down to a small, ocean side town in Rhode Island. We always viewed Rhode Island as our long-term home, so we cut our rent in half and managed to triple the space while living right next to the water. Yes, we miss the city, but we believed making the sacrifice to move to Rhode Island now was more important than squeezing out a few more years in Boston (the Red Sox sucked in 2020 anyway).
Once you know your average monthly spending and you’ve projected what you expect to spend going forward, you’re ready for the next crucial step.
Create a Separate “Runway” Savings Account
A runway savings account is a specific account that you earmark to help cover living expenses while you are making the career leap. This is not an account that is invested – it simply sits in cash in a high-yield savings account. You do not want to invest this cash in the stock market because there is a very high likelihood that you will be using it in the near future. How would you feel if your runway account decreased 40% during an economic crisis? Not great.
I recommend having at least 12 months of living expenses saved up in this account. It’s going to take time for your income to pick up and you want to avoid going into credit card debt or depleting other investments that you may have. The longer your runway, the higher likelihood you give yourself to make this dream work.
If you still have sources of income (spouse/partner’s income, side hustle, etc.), then you can probably get away with 6 months of living expenses since your monthly deficit (income minus expenses) will be much lower than if you didn’t have any income.
If you don’t have a runway account, then you are setting yourself up for failure. Yes, some people may be able to do it without a runway saved up, but you don’t want to add financial pressure to the 10+ other things causing you stress when you make this leap.
Kaleigh and I had about 18 months of living expenses (minus start up costs) saved up. I’m very glad we did because the initial plan was for her to continue working while I launched my business, but we quickly realized her new job was not a fit for her. Because we had 18 months of living expenses saved up, we felt comfortable having her also start a business at the same time so she wasn’t chained to a 9-5 role that she wasn’t passionate about.
Adjust Your Federal Student Loan Repayment Strategy
One of the very unique features of federal (not private) student loans is that you can tailor your student loan payments to match your income. Is your income reduced or even $0? Guess what – you can significantly lower your student loan payments if you are on an income-based repayment plan.
Income-based repayment plans are structured so that you typically pay about 10% of your monthly income towards your student loans. However, most people don’t know that you can re-certify your income at any time! You don’t want to be stuck paying an amount towards your student loans that is based upon your prior years’ income if your income has significantly reduced.
Now, this is more complicated if you are married with student loans. If you file taxes jointly, then your spouse’s income will still be included in your student loan calculation. However, if you files taxes separately, you could lower your student loan payment all the way to $0/month, as long as you are not on Revised Pay As You Earn (which counts your spouse’s income regardless of tax filing status).
If you are not married, and/or your spouse’s income is also low (or zero), then you may be able to benefit from the interest subsidy for REPAYE. REPAYE is unique in which the federal government pays 50% of any unpaid interest on your student loans each month. This means that you can a) significantly reduce your student loan payments which lowers your monthly spending and b) not have your loan balance grow significantly because the government is picking up 50% of the tab.
When Kaleigh left her job, we enrolled in REPAYE for her federal student loans. This allowed us to pay $0/month towards her loans while also enjoying a nice 50% subsidy from the federal government.
Create a Plan For Your Insurance Coverage
This is the most often missed part of planning that is very important. Most people are covered by their employer for disability, life and health insurance. Well, when you break away from the 9-5, you will not have disability insurance and life insurance, but you may be eligible for health insurance if your spouse is still covered.
Your ability to earn income is your #1 asset which means that it should be insured. Disability insurance pays a pre-specified monthly amount when you are no longer able to work your job and earn income. This can often be expensive to get, but it’s a necessity. You want to be sure to adjust your monthly budget to compensate for disability insurance premiums, so your plans aren’t completely derailed if something happens.
Does someone financially depend on you? If yes, you need life insurance. It’s that simple.
Some employer-sponsored life insurance plans are portable which means you can take the policy with you when you leave. Even if the policy is portable, it still may not be enough life insurance for you. What is enough life insurance? Read this blog because it’s too long to include here 😊.
I recommend purchasing term insurance where you buy a fixed, pre-specified amount of life insurance for a specific time period. You likely don’t need life insurance later in life, so why pay for it? Term insurance is the most affordable option to best cover your life insurance needs for a specific time period.
If you aren’t covered by a spouse’s health insurance, then you will find yourself searching a state exchange for coverage. When you are covered by employer health insurance, the employer usually pays a significant amount towards the monthly premium so that health insurance is more affordable to you. When you are not covered by an employer plan, you need to be ready to pay more for health insurance than you historically have and build it into your budget.
The nice thing about the state exchange is that you aren’t limited to the options provided by your employer. You are able to select a high-deductible health plan which in turns makes you eligible to contribute to the almighty Health Savings Account. In addition, there is a strong likelihood that you could be covered by your state’s Medicaid program if your income is under a specific threshold.
Keep Your Long-Term Investments Intact
Do you have savings in Roth IRAs, Traditional IRAs, 401(k)s, Health Savings Accounts, etc.? My recommendation is to keep those intact and not plan to use them while you are making this transition work. If this career leap doesn’t work, you don’t want to start from zero by depleting your hard-earned long-term savings, which reinforces the importance of having a specific runway account.
This strategy can also act as a reality check for you. If you don’t have a runway account, then the answer is not just to use your long-term savings. It may mean that you need to take some more time and build up your runway savings and/or take on a side hustle before taking the leap.
We had savings in Roth IRAs, Traditional IRAs and a HSA from the time we were working corporate jobs. Because we view those accounts as long-term money, we were able to maintain a 100% allocation to equity and invest those accounts for long-term growth. When the market declined 40% earlier this year, we were fortunate to keep those intact and benefit from the rebound in the stock market. In hindsight, I would be absolutely kicking myself if we had to withdraw money from long-term investments during a massive market decline.
- The best investment you can ever make is in yourself and your lifestyle. It’s okay for you not to save money and reduce your net worth while you are making this career leap work. If this transition works, it will give you your time back which in the end is something that no financial investment can do.
- Identify a Plan B in advance. Have conversations with your partner about what sacrifices are needed to make this work and agree upon some financial parameters. For example, if you deplete your runway account, it may be time for you to find a side gig or make another change.
- Create a specific runway account. Seriously – if there is one takeaway from this blog, it is to give yourself the financial ability to not uproot your entire financial life as you are making this career leap work.
- Be patient and stick with it. It will be a short-term financial sacrifice, but one that can win you back your time in the long run.
About the Author
Jake is the founder of Experience Your Wealth, LLC, a virtual, fixed-fee financial planning firm helping young families with student debt find the responsible balance between paying down debt, investing for the future, but also experiencing life now.
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