Getting a personal loan before quitting your job
If you’re planning to leave your job, but you need money to tide you over until you're earning again, you might be thinking about getting a personal loan.
Leaving your job can be a great way to take your career – and salary – to the next level. But if you don’t have another job lined up, figuring out how to pay your bills until you’re earning again isn’t always easy. If you’re thinking of quitting, you might have considered taking out a personal loan while you can still truthfully say you’re earning.
If you’re in this boat, here’s what you need to consider.
First, how much should I save before I think about quitting my job?
Ideally, you should have enough savings to cover at least six months of living expenses before leaving a job. How much is that? You can calculate this by first making a budget for yourself based on the past few months of spending. Don’t include any unusual expenses like that trip to Thailand you took two months ago, or your new TV. Also deduct any work-related expenses like deposits into your pension, and commuting costs.
Once you have an idea of what you need to live a reasonably comfortable life, multiply that by six. If you have this amount saved up before you quit, you should be OK until your next venture.
Don’t have enough saved?
You may be able to make leaving your job still work out financially. Let’s be real: saving up for six months of living expenses can take a long time, especially if you’re on a below-average salary. But even if you only have enough cash to cover a couple months, you have other options.
Cut down on spending
Instead of getting rid of only the unnecessary expenses like a gym membership you never use or monthly subscriptions, go through your recent bank statements and be brutal about where you can cut back on spending. Maybe you spend a lot on clothes, or at restaurants and bars, or maybe you buy a lot of lattes from the local coffee shop. Cut back in any area that isn’t absolutely essential.
Want to get extreme? Consider moving in with your folks if they live nearby. Renting alone in an expensive city can account for half of your monthly expenses. Just be prepared to start feeling like a moody teenager again (trust us).
What about a personal loan?
Taking out a personal loan before you quit a job is only a good move if you know you’re going to have a steady income from another source to cover the payments. It’s also worth knowing that lenders are working with credit reference agencies to get ongoing updates about the turnover of customers’ bank accounts (income and outgoings).
If you’re confident that you’re going to get another job – or you already have it lined up but are taking a break beforehand – a 0% credit card could be an option to tide you over until you’re earning again, as long as you pay off your balance before the interest-free period ends (after that, the interest rate is likely to be high). Another credit card will present you with more temptation to spend, but if you know you’ll be sensible, it’s worth considering.
Can I take out payment protection insurance?
Taking out payment protection insurance (PPI) covers loan payments in the event that you fall ill or are made redundant. It won’t cover you if quit your job.
Checklist before you quit your job
- Build an emergency fund. Because you don’t have the safety net of a job, make sure you have an emergency fund should you get into an accident or need money in a hurry.
- Take care of your retirement account. Different employers have different policies when it comes to retirement savings. Some allow you to roll over your funds into another retirement account, making you responsible for deposits each pay period. You might also be allowed to leave it where it is, though you might have to pay some administrative fees. Ask your HR department what your options are.
- Pay your bills ahead of time. That way you don’t have to worry about leaving room in your budget for utilities and essentials for a few months.
Leaving the stability of a job can be scary, but also an exciting career move. Having a good sum of money saved to cover living expenses makes quitting more comfortable. Taking out a personal loan when you don’t know how you’ll fund the repayments isn’t a smart move, but consider a 0% credit card to give you some breathing space, if you’re confident you’ll be earning again soon.
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