Here's How to Plan Your Finances If You Are Taking a Sabbatical Leave

My cousin, Kaustubh, has been working as a Senior Software Developer in one of the leading software companies. He completed his B.E. from a renowned college in Pune. Kaustubh thinks that pursuing M.S. from a top university abroad can help him boost his career. So, he is planning to take a sabbatical leave and pursue M.S. from one of the top universities in the U.K.

Like Kaustubh, many individuals take a sabbatical leave for various reasons, such as to pursue higher education, take care of the newborn, develop a skill, chase their hobby, address their own or family member's health issues, improve their mental health, or work on building their own business. In any case, planning your finances before taking a sabbatical leave is crucial. This article elucidates how you can plan your finances before taking a sabbatical leave to ensure you spend your career break without any financial stress and focus completely on your objective.

"A sabbatical is a leave or a break from your job while you are still employed with your current employer and expected to return to work at the end of the leave."

1. Research and brainstorm:

Providing sabbatical leave is not mandatory for organisations; hence, not all employers offer sabbatical leaves. Before planning any further, it is best to check with your employer and get all the details about sabbatical leave.

If you are ready to take the plunge, start with researching and brainstorming about the objective for which you are opting for a leave. For example, if you are taking a sabbatical for higher education, research the suitable courses, check the eligibility criteria of the university you are aspiring to get into, talk to the students and teachers who can guide you in the process, and so on. Talking to people who have been in the same boat and listening to their experiences and bits of advice will help you make your journey convenient.

Doing thorough research will give you an estimate of your future expenses, which will help you plan your finances better.

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2. Calculate fixed expenses and create a budget:

Preparing a budget is the key to being in control of your finances. A budget allows you to analyse your monthly inflows and outflows. List down all your fixed and variable expenses. Aim at cutting down your expenses (cash outflow) and increasing your saving (inflow - outflow) as much as possible. While you may not be able to control your fixed expenses like house rent, EMIs, insurance premiums, etc. , you should cut down your variable expense by avoiding unnecessary spendings, such as partying, dining, buying expensive clothes and gadgets, etc. Create a budget for your fixed expenses and stick to it.

With your existing savings, you can manage your fixed expenses during a sabbatical leave. A Systematic Withdrawal Plan (SWP) allows you to withdraw a fixed amount from your mutual fund investments periodically. However, make sure you do not use the investments made for specific purposes, such as retirement, a child's education, etc., that can disrupt your financial future.

3. Start living on the new budget:

Since your part-time salary or income received through investments will be substantially lower than your current salary (unless you have extravagant savings), you will not be able to continue the same lifestyle. Making lifestyle changes can be challenging for most individuals. Therefore, as you create a budget to meet your financial needs during the sabbatical leave, you should start living on the re-adjusted budget from now itself. This will ensure you do not suffer from low income in future as you will save more for the sabbatical.

4. Review your investment portfolio:

When you are earning a decent amount and are in the initial or middle stage of your economic cycle, you might have more exposure to market-linked financial products, such as stocks and equity mutual funds. You may also have several Systematic Investment Plans (SIPs) towards your financial goals.

However, when you are taking a sabbatical leave, you might not be able to contribute towards these SIPs. In such cases, many investors liquidate their SIPs. However, as discussed earlier, your sabbatical should not disrupt your financial goals. Hence, if you cannot afford to continue with your SIPs, it is best to pause them for the time being and restart contributing to the same SIPs once you resume to work.

Furthermore, before taking a sabbatical, it is advisable to review your investment portfolio. Since you may not be in a position to stay invested in high-risk investment avenues and need a more stable income, you should reduce your equity allocation and give more exposure to fixed-income products like bank fixed deposits and debt products, which will give you steady income to meet your everyday expenses.

5. Clear off your debt:

When taking a career break, it makes sense to enter into this new phase debt-free. This will substantially reduce your financial burden when your earnings have stopped or reduced. However, if your existing debt is huge, you might not be able to clear the entire loan in a short duration. Hence, to make sure you smoothly manage finances during your sabbatical, it is advisable to clear off as much debt as you can. You can prioritise paying off your high-cost loans like personal loans and car loans first, which will help you save the total interest outgo. The reduced debt burden will bring peace of mind when you are already stressed about the new change in life.

6. Create a contingency fund:

An emergency can knock at the door at any time. A contingency fund can help you meet such emergency expenses during a sabbatical without liquidating your investments made for specific goals.

Currently, when there is increased uncertainty in the job market, making a provision for contingency becomes the most important task you need to do for yourself.

While there is no thumb rule on how much the contingency fund should be, it is best to save at least 12 to 24 months of your regular monthly expenses, including loan EMIs and insurance premiums. It makes sense to sensibly figure out a sum of money that will provide you with a safety net. In a difficult phase of life, this fund will help you sail in rough seas.

7. Buy adequate insurance:

Life is unpredictable, and you never know what tomorrow has in store for you. If you are the breadwinner of the family, at the back of your mind, you always think of your family's security in your absence. In today's fast-paced lifestyle, securing yourself and your family with adequate Life Insurance is necessary. It is the ultimate solution that ensures your family is financially secure in case of the unfortunate demise of the insured.

Similarly, a medical emergency in a family can drain all your years of savings in just a few days. Health Insurance provides coverage against any medical emergencies arising out of an injury, illness, or accident. It extends its coverage to medical expenses, such as hospital bills, medicines, consultation fees, etc.

Hence, before taking a sabbatical leave, make sure you have adequate life insurance and health insurance coverage. Moreover, if you are going to study abroad, you should buy adequate coverage of Student Travel Insurance, which is specifically designed for students travelling abroad to pursue higher education. It provides coverage for expenses like hospitalisation due to a medical emergency arising out of an illness or accident, flight and baggage delays, study interruptions, etc., among others. Since the policy is designed for students, the premiums are much lower compared to regular health insurance or travel insurance plans.

8. Opt for an education loan, if necessary:

This point is for those who are planning to take a sabbatical leave for higher education. While you may have a certain amount saved in different investment avenues, it is advisable to opt for an education loan to finance your education. During the course period, you will mostly have no income source, or even if you plan to work part-time, you will likely be able to meet only your fixed expenses with it. Therefore, it is best to avail yourself of an education loan that will also cover your living expenses.

Besides, an education loan likely makes the students more responsible towards their finances. As you start working and repaying your education loan, you claim the interest paid towards the education loan under section 80E of the Income Tax Act, 1961.

To conclude:

When taking a sabbatical leave, you must have a career return plan ready and be confident about the financial plan you have made to manage your expenses during the sabbatical.

If you are still figuring out your finances and have at least three years in hand to build the sabbatical fund, PersonalFN's SMART Fund Explorer can help you plan your finances with a smartly done mutual fund investment. You simply have to state your goal (in this case, others - higher education), the amount required in today's terms, the time in hand, and the lumpsum and/or SIP contribution you can make for the goal. Based on the information provided by you, the SMART Fund Explorer will provide you with two investment options you can choose from, considering your risk profile.

Happy planning!

KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.