Monday, October 8, 2018

How I Prepared Financially for Quitting My Job

Happy Thanksgiving to my fellow Canadians and Happy Columbus Day to my friends in the U.S.!

As promised, I am posting a video on how I prepared financially for quitting my job, and I wanted to put together a corresponding blog post with some additional details. One word of warning: there is nothing groundbreaking in this video. In fact, I posted a video on How to Save Money in 2015, and a lot of the tips I shared in that video are echoed in this one. It may take time (for me, it took 18 years to become comfortable with taking the risk of quitting my full-time job), but with some financial discipline, you can reach your financial goals.

Note: I am located in Canada so some terms in my finances videos are Canada-specific.

Here is how I set myself up financially to quit my full-time job:

1) I became debt-free.

I've always advocated paying off your debts as soon as you can. Many people use leverage (i.e., taking on debt) to build wealth; however, I am risk averse and I've never been comfortable with owing money, so I preferred to go the debt-free route. Below is my experience with a few of the more common types of debt:

Credit cards: I moved out when I was 18 years old, and I got a rude awakening when I found myself with credit card debt. It wasn't a substantial amount, but it was enough to get calls from collection agencies, and I found the whole situation very stressful. As a result, I cancelled all my credit cards, and started paying cash for everything. Eventually, when I graduated from school and started working full-time, I re-applied for several credit cards. Since then, I have always paid my monthly balances in full. Credit cards can provide useful perks like cash back, rewards, insurance coverage, etc.; however, I do not recommend using them if you cannot pay the entire balance each month.

Student loans: I was fortunate to come out of school without this type of debt; however, hubby had substantial student loans to repay. We were still dating at the time, but I encouraged him to pay off the debts as soon as he could, and he did! That helped set us up for future financial success.

Car loans: Hubby and I don't own a vehicle, and we have never had this type of debt. I don't drive, and hubby (when he had a car) bought an inexpensive used car and was able to pay cash.

Mortgages: I purchased this condo around 12 or 13 years ago. Hubby and I were dating at the time, so I took care of the down payment and closing costs. We knew we were going to get married at some point, so when we moved into the condo, hubby started contributing to the mortgage. We took advantage of all our privilege payment provisions and paid off the condo in 5 years. We have been debt-free since. This is the area where many people intentionally take on debt to purchase investment properties or rental properties. This can be a financially advantageous strategy; however, it's not something that hubby and I were comfortable with. Could we make more money if we purchased a rental property? Perhaps, but this isn't something we are currently interested in doing.

2) I met my annual savings goals and invested my money to generate passive income.

If you follow my goal setting videos, I usually set an annual savings target. I meet my savings goal by doing the following:

(i) Paying myself first - when I was working full-time, I contributed to the employer-sponsored RRSP, which included matching up to a certain percentage. My savings rate always meets or exceeds this percentage.

(ii) Transferring out all funds in excess of the minimum balance required in my chequing account to waive the monthly fee - since my primary chequing account pays zero interest, I would transfer these funds to other financial instruments like high interest savings account, GICs, stock accounts, or mutual funds.

(iii) Making lump sum payments to my RRSP to max out my contribution room - this typically resulted in me receiving a large income tax refund, and I would then take this money to repeat step (ii) above.

Since I don't plan to work for the next year or so, I won't have an annual savings goal for 2019; however, I still plan to track my expenses and set goals in this area.

3) I stopped wanting stuff and reduced my expenses.

Those of you who follow my YouTube channel know that hubby and I like to treat ourselves. I went through phases where I loved spending money; however, I always made sure I saved money first. Our disposable income increased significantly once we became debt-free, so we definitely indulged a bit. I went from spending a lot of money on camera gear, to handbags, to makeup, to clothing, to dining out at restaurants, to travel, to alcohol - sometimes I spent money on multiple categories at the same time. Thankfully, the lavish spending eventually got old. I got tired of all the clutter and all the excess. Growing up, I was never one to spend a lot of money, and I didn't feel like I was being true to myself when I was spending so much. I started setting annual goals, participating in monthly challenges, and doing mini experiments to see if I could live more simply and with less stuff.

I did the makeup inventory and started decluttering. That led me to not want to buy beauty products (or other stuff) anymore.
I did the capsule wardrobe challenge. That led me to not want to buy clothing anymore.
I did the eat-at-home challenge. That led me to not want to go out to restaurants anymore.

My expenses reduced dramatically. For the first time I can remember since becoming debt-free, I didn't want anything in terms of material goods. The only thing I wanted was more time. I reviewed my finances over and over again, and the math made sense. That was when I knew I could leave my job. Once I left, I wanted even less. Now, I don't even want to travel or drink. I didn't know it at the time, but with the benefit of hindsight, I think I was using all the stuff as pacifiers. I felt like I should reward myself because I was unhappy with work.

Three other notes.

These are personal factors but they definitely contributed to me feeling comfortable with my decision to leave my job:

a) Although I am no longer working full-time, I still have some form of income: passive income from interest and dividends, potential for capital growth from stocks and mutual funds, active income from project work. I'm also thinking of taking on "fun" part-time jobs here and there. These would be jobs I might have wanted to try, but never really considered because I simply didn't have the time when I was working full-time.For example, I'm toying with the idea of working (or volunteering) at a film festival during my time off.

b) Hubby is still working full-time, and this is a huge security blanket. We have health and dental benefits coverage from his full-time employment, which is also definitely a plus. That being said, I am not expecting him to cover any additional expenses as a result of me quitting my job - I will still be paying my half of our shared expenses. Hubby continuing to work full-time provides me with peace of mind in case I don't pick up work immediately after my gap year.

c) Once we realized we wanted to build a life together, hubby and I had "the talk," and we mutually decided not to have children. While the decision involved more than the just money aspect, it of course had a huge impact on our financial situation. I realize not everyone makes the same decision we did, but I wanted to mention it because it is a major factor in how we met our financial goals.

That's it for today's long-winded post! I plan to do a lot more videos on this type of topic, so please let me know if you have any questions.

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