We’ve all thought about leaving our current job to follow our dreams at one time or another. But actually doing it is considerably more complicated. A nine-to-five might not be conducive to the most exhilarating lifestyle. But it does offer a certain amount of stability and long-term financial security. But always set the stage before quitting your job.
If you’re tired of working at your current job and want to try doing something you love, there are a few things you should know before making that choice.
I’m someone who quit a demanding corporate job to pursue his dream of going full-time with my personal finance blog (yes, a blog!). I speak from experience as I describe below seven important factors to consider when you’re trying to decide whether or not to quit your job.
1. How Much You Have in Savings Before Quitting Your Job
Even if you end up becoming incredibly successful in your new line of work, chances are that it will take a while for things to get off the ground. Losing your primary source of income is a major financial change. And you probably shouldn’t do it if you don’t have enough money saved up.
It’s hard to predict exactly how much savings you’ll need. But somewhere between three and six months’ worth of income is a good place to start. This will give you enough time to test the waters and see how things go on your own without feeling immediate financial pressure. The more you’re able to save, the more flexibility you’ll have after quitting your job.
With that in mind, you should consider keeping your job while you work on the first steps toward achieving your own goals. Take some time to do market research and evaluate your options before making such a strong commitment. Continuing to work will also give you an additional boost in savings before you lose your income.
2. What to Do with Your 401(k) Plan
401(k)s are relatively simple to manage as long as you stay with the same company, But things get more complicated when you leave your job. There are a few different things you can do with the money you’ve accumulated. Look into your options to see which one is right for you.
Option 1: Keep Your 401(k) As-Is
The simplest option is to simply keep your old employer’s 401(k) as-is. If the other options below don’t present a compelling argument, then this is a perfectly reasonable option. In fact, it’s what I did when I quit my job.
Option 2: Rollover the Balance Into an IRA
Most employer-sponsored 401(k) plans provide a limited range of options. Some may charge some pretty hefty fees. An IRA might offer more flexibility if you’re planning to work on your own. You’ll have the opportunity to shop around with different brokers. Compare different plans to identify the one that matches your long-term financial goals.
Option 3: Rollover the Balance Into a New 401(k)
Just as you can transfer your 401(k) plan to a new employer, you can add your existing funds to a new 401(k) within your own business. Solo 401(k) plans are designed specifically for entrepreneurs and people who are self-employed. They also allow you to borrow up to 50% of your account value to invest in your business.
Since 401(k) plans aren’t subject to taxation until you withdraw the money, they reduce your current taxable income. That enables you to pay a lower effective tax rate each year you make a contribution. You’ll probably earn less money when you retire than you do now, and end up paying less taxes.
Option 4: Withdraw the Money
Generally speaking, I wouldn’t recommend that you withdraw the money in your 401(k) plan. Money you withdraw before age 59.5 is subject to income tax along with a 10% penalty. You should think carefully before taking your balance out of a 401(k) before retiring.
Withdrawing from your 401(k) can be the best option if you don’t have much in savings. It can also make sense if you need more money to invest in a new business. Acquiring capital is one of the most common difficulties for small business owners, The cash from your 401(k) account could help your company move in the right direction. That said, it should be considered a last resorts, due to the costly taxes and penalties applied to early withdrawals. Be sure to speak with a financial advisor before doing something like this.
3. Know How You’re Going to Get Health Insurance Before Quitting Your Job
Health insurance is one of the top concerns for people who leave their jobs. This is not surprising given healthcare costs in the US are higher than any other country. Many employers provide health insurance to their employees, but you’ll need to make your own arrangements after quitting.
Keep Your Plan with COBRA
The Consolidated Omnibus Reconciliation Act (COBRA), passed in 1985, allows people to keep their employer’s health insurance plan after leaving the job. Although this is sometimes the best option, there are also important downsides you should be aware of. Make sure to research each of your options before continuing with the same plan.
There will no longer be an employer health insurance subsidy. You’ll be responsible for the entire premium if you choose to keep your plan under COBRA. Furthermore, this coverage is only available for 18 months after you quit your job. However, your dependents could be protected for up to 36 months in certain cases.
Buy a New Plan
COBRA was a more popular option when healthcare providers could change costs based on pre-existing conditions. But recent reforms prevent businesses from charging more because of your health. The official site of the Affordable Care Act has all the information you need to know about getting your own health insurance.
Buying health insurance yourself gives you the chance to compare different plans. You can pay for exactly what you need and nothing more. Corporate healthcare plans often come with high deductibles, so check healthcare.gov to find available plans in your area. The website will also let you know if you’re eligible for programs like Medicaid and CHIP. Either could significantly reduce your healthcare costs.
Personally, I went with a high-deductible, HSA-eligible plan through my state’s exchange. Being young and relatively healthy, I don’t necessarily need top-of-the-line health coverage. I figured I’d rather enjoy the tax benefits of an HSA than get more expensive coverage with less out of pocket costs.
4. What to Put in Your Business Plan
Many entrepreneurs think they have the next big idea. But the reality of running a small business is often much more complicated. Turning an abstract idea into a profitable company is never simple. And it’s easy to underestimate just how challenging it could be to make it on your own.
With that in mind, it’s critical to have more than just an idea before you begin to seriously consider leaving your current job. Talk to people in your target industry to gather feedback. Create a clear business plan for the new company—don’t quit your job on a short-term impulse.
If you don’t have enough in savings to cover startup costs, you’ll also need to come up with a plan for finding investors. While entrepreneurs have access to a range of investment options, getting someone interested in your project can be extremely challenging. Creating a strong business plan will go a long way toward reassuring potential investors of your long-term viability.
5. How to Maximize Your Connections
Connections are always important, but they’re especially critical for entrepreneurs. Without a predictable source of income, you’ll need to draw on some of those contacts to help your new business succeed. Networking is an underrated skill that can make or break any small business.
If you work in the same area that you’re targeting with the new company, you’ll already have valuable connections within the industry. That said, it’s important to keep focusing on outreach and looking for new contacts. Focus on those who could become valuable resources once you’re working on your own.
Don’t delay thinking about networking until after leaving your job. It should be one of your top priorities before quitting your job. Start reaching out to potential contacts about the idea and connecting on LinkedIn and other platforms.
Relationships with Coworkers and Employers
Even if you’re ecstatic to be leaving your current job, it’s extremely important to quit cordially. Translation: Always leave on a positive note. It doesn’t matter how confident you are in your idea. The truth is that it’s impossible to predict the success of a small business. In fact, about half of all new businesses fail within the first five years.
If you burn bridges with your current employer, you could find it much more difficult to find a new job if things don’t go as you planned. You’ll also miss out on any opportunities to form a business relationship with your old company. Let them know about your choice as soon as you’ve made the decision. Then do what you can to make the transition as smooth as possible.
6. How to Update Your Budget
Budgeting is a critical financial skill that everyone should be comfortable with, and it will become even more important after leaving your job. You may have to live on a smaller budget without a steady source of income, and you should prepare for this before leaving rather than after.
Once you quit, you’ll need to start living on savings along with any withdrawn retirement funds until your new business grows enough for you to take home a salary. The longer you can stretch your cash on hand, the more time you’ll have to dedicate yourself to the company without having to worry about money. Practice better budgeting before quitting your job.
If you have $30,000 in savings and spend an average of $3,000 per month, for example, you could live on that money for ten months and focus entirely on your business. On the other hand, if you’re able to drop your monthly expenses to $2,500, you’ll have two more months to work full-time at your company without taking a salary.
Adjusting to a lower budget can be tough, but financial discipline is a crucial skill for any entrepreneur. If you believe in your company’s future, it’s worth sacrificing some comforts in order to give yourself the best chance of success. Go over recent bank statements and look for ways to spend less money each month.
7. Be Ready for the New Challenges You Will Face Before Quitting Your Job
Even if you really do have a great idea, it’s easy to underestimate just how difficult it is to run your own business. Compared to most often jobs, entrepreneurship requires a much wider range of skills and often significantly longer hours. Starting your own business isn’t a decision you should make lightly.
Most jobs in larger companies involve a small range of duties that contribute to a larger business plan. If you’re currently in marketing, for example, your job is simply to develop campaigns that connect with new customers and increase long-term engagement. While you might cooperate with other departments, your role in the business is relatively predictable.
As an entrepreneur, you’ll be responsible for nearly every aspect of your business, especially in the early stages before you’ve hired any employees. Entrepreneurs can’t afford to be specialists—you need to be effective in everything from hiring and training to marketing and sales.
Similarly, it’s impossible to predict what will come up in a typical work week as an entrepreneur. Managing so many different things can be overwhelming, and it takes exceptional time management skills to keep up with everything you need to do for your business. It’s not unusual for entrepreneurs to work substantially more than 40 hours per week during their first few months.
Hiring is a crucial skill for entrepreneurs, and attracting top talent is a significant competitive advantage for any small business. When you have fewer employees, each one has a much greater impact on the success of your company. If you have long-term experience in the field, you’ll have an easier time identifying people who are likely to succeed.
Getting the most qualified workers interested in your brand is often just as difficult as finding investors. More than ever, employees are looking for businesses that align with their values and offer more than just a high salary.
With that in mind, it’s important to prioritize company culture from the very beginning and identify candidates who exemplify these goals and beliefs. Don’t settle for the first candidate just to end the job search—it’s almost always better to wait for someone who matches well with your organizational culture.
Turnover is incredibly costly for businesses of all sizes, so you should try to hire people with a long-term future at your company whenever possible. People who feel passionate about your brand and mission are often more valuable than more qualified candidates who would only be there to collect a paycheck.
Before quitting your job to start working on your own is an exciting opportunity, but it’s important to be realistic about the positive and negative consequences of such a major decision. Think carefully about these factors before committing to entrepreneurship and losing your primary source of income.