Almost everyone dreams of quitting their job to snag a promotion and boost their paycheck at another company, launch a money-making startup, retire early or maybe take time off to travel.
But, if you fantasize about triumphantly proclaiming “I quit my job!” at your next happy hour with friends, you should have an exit strategy. To map out the best route to a new beginning, consider these factors first to make sure you’re ready to quit your job.
It’s easy to say, “I want to quit my job.” But, unless you have a trust fund or permanent dibs on your parents’ basement bedroom, it’s critical to have some sort of plan in place.
If you want to be your own boss, that might mean putting together a formal business plan. If you want to hit the road, it probably makes sense to have a long-term itinerary in mind. And if you’re taking time off to be a stay-at-home parent, maybe you want to start a side gig to keep your skills sharp and your resume ready for when you re-enter the workforce. No matter what your dream is, putting in some financial forethought can go a long way toward making your resignation a reality.
Check your current contract for conditions related to resigning. Is there a mandatory notice period? Are there data security details you need to keep in mind? Does your employment agreement include a noncompete clause that might prohibit you from moving to a rival for a raise or starting your own business in the same industry?
Although such noncompete agreements were once mostly found in executive-level contracts, an increasing number of employers are writing them in for workers up and down the salary scale, The New York Times reported. Violating one could lead to a lawsuit by your ex-employer, so it pays to check the fine print before deciding how to quit a job.
Although you might feel like screaming, “I quit!” and peeling out of the parking lot at top speed, the best way to leave a job is on good terms. Some contracts don’t require a certain notice period, but conventional career advice recommends giving your boss two weeks’ notice and a written resignation letter.
Depending on the circumstances, your employer could ask you to stay on for a stretch or request you pack up your pens and go. In case you find yourself immediately out of the office, it makes sense to have a resume ready before you call it quits. Even if you’re planning to travel or take time off for other reasons, it never hurts to have an updated version of your resume, individually tailored to highlight specific talents or experience.
Another factor that could dictate how to resign from a job is your state’s rules regarding final paychecks. Some states require employers to compensate you on your next regular pay date. Others call for compensation as soon as you turn in your resignation. And some states specify payment for unused vacation, but in other states, it could be an employee’s loss once they resign.
For example, California workers should be cut a check for their work and unused paid vacation time unless otherwise stipulated by a collective bargaining.
For people with entrepreneurial aspirations, it’s critical to have startup costs covered before you quit your day job.
Founders needed a median of $17,500 to launch a business in 2015 and put up 57 percent of the capital themselves, according to the most recent Global Entrepreneurship Monitor U.S. Report produced by Babson College. But, startup costs can vary significantly depending on various factors, including location and industry. For instance, running a brick-and-mortar retail store or restaurant will most likely require a higher initial investment than operating a service industry business from a home office.
Similarly, leaving your job to travel will take some financial planning, even if you aim to live on a backpacker’s budget. There are a number of resources and tools online that can help you create a budget blueprint. For instance, because you won’t be tied down by a weekly work schedule, visiting popular vacation spots on weekdays or traveling during the off-season can add up to significant savings.
Carrying credit card balances and other high-interest debt isn’t ideal under any circumstances, but it’s especially important to get your balance sheet in the black before leaving a job. If you have major debt-driven expenses, take a long look at your spending and income well before you quit your job. Are there any unnecessary expenses you can trim to divert those dollars to your debt load? Is there any way you can earn more money to pay off debts faster?
For example, if you’re an aspiring entrepreneur, you might be able to clear clutter and make way for a home office while selling some underused items on eBay or Craigslist. Or, you could begin ramping up your business after hours while holding down your day job, building a client base and earmarking extra earnings for debt repayment. If your dream is to quit your job and travel for extended stretches, consider renting out your place through a home-sharing site like Airbnb.
As you’re demolishing debt, take the time to review your credit reports and do what you can to boost your credit score. Under federal law, you’re entitled to a free copy of your report from all three major credit reporting agencies once every 12 months. Get a copy of each and check for misspelled names, accounts you never opened or paid-off debts that haven’t been updated in the record. Dispute any errors you see with the creditor and the credit reporting agency.
The data on your credit report can affect your ability to get loans, the interest rates you receive or even whether or not you land a new job. So, if your credit score still stinks after correcting errors, you might want to work on it before penning a resignation letter. Paying your bills on time and maintaining a respectable credit utilization rate — the percentage of available credit you’re using — are good places to start cleaning up your credit act.
Before giving up your regular paycheck, you should know exactly how much you owe every month in fixed expenses. Fixed expenses include bills such as mortgages, car payments, auto insurance and other regular financial responsibilities. Although you can reduce these expenses, it’s unlikely they’ll go away entirely. After all, you’ll still need a place to live after leaving your job, and your friends might not be happy to have you crash on their couches.
Although some variable expenses — like groceries — might not be entirely optional, you can also squeeze some slack out of your budget by spending less at the supermarket. You can also eliminate extras like gym memberships and subscription services for everything from cable to Amazon Prime.
It’s also important to study the other side of the balance sheet. Do you know exactly how much you make each month? It might seem like a simple question, but your employer could be covering much more than your salary. Likewise, a portion of your own pay could be going toward retirement accounts and healthcare costs.
Find out exactly what all those columns on your pay stub mean and consider how you’ll handle health insurance, retirement savings and other adult essentials once you leave your job.
If you’re leaving your current career to pursue another profession right away or seek a dream job in a different city, squirreling away enough cash to cover three to six months of expenses might provide an adequate savings safety net. If you’re leaving a day job to travel or launch your own business venture, it probably makes sense to set aside even more money for a rainy day — or quarter.
If you’re wondering how to quit your job without resorting to a bare-bones budget, certified financial planner Phil Dyer, the chief executive officer at Dyer Financial Advisory, recommended looking at your other income sources.
You might be prepared to stop slaving for a salary if your annual guaranteed income from all sources, such as pensions, annuity payments, Social Security payments and investment income, cover your living expenses on an after-tax basis, said Dyer, who specializes in helping clients reach financial independence. Or you might be ready to retire — or resign for an extended sabbatical — once the annual earnings on your investment portfolio surpass your salary.
“The caveat I would add is that if you retire prior to Medicare eligibility, then you’ve got to have a plan in place to cover healthcare expenses, which can easily run $900-plus per person just for health insurance, not counting co-pays, deductibles, etc.,” said Dyer. “This is one of the biggest challenges for those looking to retire early.”