By Ashima Agarwal
There are times when one takes a long break from work, sometimes by choice, sometimes by force. There can be many reasons for taking a break such as higher education, maternity, taking care of the elderly or the sick at home, opening a business, long vacations, etc. The period of break or sabbatical may range from 6 months to 3-4 years. That is why careful planning of finances during that period is extremely critical.
Let’s talk about Ramesh, an IT professional who has been working for the last 10 years. He now plans to take a sabbatical for 3-4 years to prepare for his MBA entrance exams and then to complete the course. He lives in Delhi with his mother, wife and a seven-year-old son. What should Ramesh plan for before taking this big step in his life as he is the only earning member?
Estimate expenditure
The first step is to estimate the monthly/ annual expenditure of the household. Once that is done, the next step is to plan for a monthly income that covers his and his family’s monthly expenses, any annual expenses such as health insurance premium, car premium or any other unforeseen expenses.
Ramesh’s monthly expenditure is estimated at Rs 30,000 per month (annual expenses Rs 3.6 lakh) and with an estimated other annual expenditure of Rs 2 lakh, the total annual expenses shall be over Rs 5 lakh. With an additional expense for his education, an anticipated cash flow of around Rs 15 lakh per annum would be required for the next 3-4 years. There could be multiple ways to arrange for the same. He can take an education loan from banks and repay it after completion of the course / getting a placement. The second option is to meet the expenses from his own savings or have a mix of both of these options (partly loan and partly own capital).
He can put aside around Rs 25 lakh in a bank account and withdraw Rs 5 lakh per annum to meet his expenses. In this case, he will be left with no money at the end of five years. His education in this case will be funded via an education loan. But if Ramesh fails to fetch a decent placement, then he may have to face a financial crisis.
Monthly income
Another option is to look for suitable investment schemes. To ensure a monthly income, money can be invested in post office schemes such as Monthly Income Schemes, which will ensure the investor meets the monthly expenses. Investment in high dividend yielding stocks can fetch him regular dividend income.
The monthly returns from the above investment will help Ramesh cover his monthly expenses and also help him focus on the reason for a long break without worrying about the future. Also, the corpus invested will increase over time ensuring financial stability for his family.
One should always be prepared for the worst. Having an emergency fund is very important as not every emergency expense can be covered by either insurance or the investments made for the sabbatical.
Taking a break from your regular life is important. While a lot of us want it, very few end up taking it. If one is serious about taking a break in future, planning for finances and investing for the break becomes a necessity. When you do not work, your investment will definitely work for you.
Financing a break
- Estimate annual expenditure of the household.
- Make suitable investments to meet your expenses during the sabbatical.
- Take a loan if you are taking a study break.
- Having an emergency fund is very important.
(The writer is assistant professor, Amity Business School, Amity University)