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How much money should you save if you're quitting your job without another one lined up?

Money expert Mandi Woodruff-Santos explains how to figure out how much money you need to save before leaving your job if you don't have another one lined up.

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kate_sept2004 | E+ | Getty Images

Quitting your job is a big deal, and there are a variety of reasons why you might decide to make this move. Maybe you're burnt out and need a break, perhaps you've found a better opportunity with another employer or you've finally decided to take the plunge and start your own business venture.

This year alone, 4 million Americans have quit their jobs, according to the U.S. Bureau of Labor Statistics. And a report from Digital.com, an independent website for small business tools, found 1 in 3 workers quit their jobs to start their own business in the last six months.

Before quitting a job — especially if you don't have another one lined up right away — it's important to create a plan for keeping yourself (and your family) afloat. There are certain living expenses you're still responsible for, after all. Building a nest egg of cash is an important part of this plan.

But how do you know when you've finally saved up enough money to comfortably move on from your job?

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Select spoke with Mandi Woodruff-Santos, a wealth-building expert and podcast co-host who grew her net worth enough to make the switch from a corporate job to full-time entrepreneurship. She shared exactly what you should consider before quitting and how to calculate how much money you need to save before leaving your job, especially if you also hope to start your own business.

Is quitting cold turkey a good idea?

For years, the general advice has been that you should never quit your job unless you already have another opportunity lined up. The "cold turkey" approach — where you leave a job without securing another opportunity — can leave you feeling stranded if you don't adequately prepare for the loss of income and benefits like health insurance and automatic 401(k) contributions.

The question of when exactly to quit your job is one that people who dream of entrepreneurship are likely very familiar with. And, sure, quitting your job can certainly free up your time so you can focus exclusively on starting your business. However, it's usually more prudent to work on your own venture while you still have the security of a regular paycheck and benefits. After all, most people still have expenses like rent and food that need to be covered while getting their new business off the ground.

"I'm not a huge proponent of quitting cold turkey and not having anything lined up, especially now in today's remote-work environment where you have so much flexibility while you also have the benefit of a paycheck," says Woodruff-Santos.

So before you start composing that two-weeks' notice email to your HR department, you'll want to take a few additional steps to ensure that you're adequately setting yourself up for a comfortable level of financial security. And if you're starting a business, you might want to give yourself an income goal and once you're able to maintain that level, then consider next steps.

What are the invisible costs of quitting your job?

One important step for ensuring financial security after you quit your job is coming to terms with some of the hidden costs of leaving your employer.

When working for an employer, you may have been enrolled in a company-sponsored health insurance benefit where a small amount of your pre-tax paycheck went toward covering your premium. But once you say goodbye to your company, you'll be on the hook for finding your own health insurance coverage, which can cost an average of $495 per month or more, depending on where you live and the number of dependents you have on your plan.

"I couldn't have started my business as quickly if I didn't have my husband's health care," Woodruff-Santos explains. "Health care is one of the reasons why people may find security in a 9-to-5 job, and I don't want people to get the impression that quitting your job and launching your business is so easy."

According to Woodruff-Santos, the cost of health insurance should be factored in when trying to figure out how much of a cash cushion you need to build before quitting your job. She recommends using the site healthcare.gov to get an estimate of what it could cost you each month to cover your own health insurance.

And for people who are quitting their jobs to start their own business venture, Woodruff-Santos points out that there are a number of business expenses that are easy to accidentally leave out of the equation.

"Maybe you have some specific equipment you need to use for your business, or maybe you've been using your company laptop to work on your business, but now you'll need to return it and get your own laptop," she says. "I have all these subscriptions like Quickbooks, a calendar scheduling service and a social media posting service for my business. These are around $100 to $200 a month [total], and they're upfront business costs that really add up."

If you're leaving your company to go the entrepreneur route, these hidden costs should also be considered when figuring out how much money you need to save before you can comfortably quit your job.

How do you calculate how much money you really need to save before quitting your job?

To figure out how much savings you need before quitting your job, you should consider your various living expenses (rent/mortgage, transportation, insurance, food, debt repayments, dining out, gym memberships, etc.) and how much you actually spend to maintain your lifestyle each month.

Woodruff-Santos has always been cognizant about having a cash cushion of several months' worth of expenses on hand in case either she or her husband lost a job or wanted to quit. So while she didn't save money specifically to quit her corporate job and start a business, she knew she was in a comfortable position to leave because of all that money she stashed away over the years. She's made it a point to always have up to 12 months' worth of expenses saved up.

"For me, that number made sense because I'm a mom, so my lifestyle is expensive with those major responsibilities on my plate," she says. "If you're young and have fewer responsibilities on your plate, and you're only looking out for yourself, you may feel comfortable with saving up less. But you'll never regret having too much of a cash cushion when starting your business."

And, of course, don't forget to factor in those monthly hidden costs like health insurance.

Once you figure out how much you spend each month to keep yourself afloat, you'll want to multiply that by the number of months of down time you're trying to cover. Let's say you spend $2,000 per month, and think you'll need six months before you're ready to take on your next venture, you'll need to save at least $12,000 to cover your expenses.

Does your emergency fund count?

When it comes to building up a comfortable savings cushion before you quit your job, you may have noticed that the approach is similar to the way you'd go about building up an emergency fund. And you may wonder: Can you just use your emergency fund as your cushion of savings for quitting your job?

"Ideally, you would want to separate the two," Woodruff-Santos says. "Emergency funds are meant to be set aside for one-time unexpected expenses, like your car breaking down. If you know you're going to quit your job, and it will take you a long time to get set up for your next move, you want to go beyond what you'd set aside in an emergency fund."

And just like a regular emergency fund, you can build your "I want to quit my job" cash cushion in a high-yield savings account where you'll have easy access to it when you're ready to make withdrawals in the very near future.

Accounts like the Marcus by Goldman Sachs High-Yield Online Savings Account and the Ally Bank Online Savings Account are generally simple to set up — it only takes a few minutes — and connect to your checking account so you can easily transfer portions of your income to your savings and start earning a higher interest rate on your money.

Marcus by Goldman Sachs High Yield Online Savings

Goldman Sachs Bank USA is a Member FDIC.
  • Annual Percentage Yield (APY)

    1.90%

  • Minimum balance

    None to open; $1 to earn interest

  • Monthly fee

    None

  • Maximum transactions

    Up to 6 free withdrawals or transfers per statement cycle *The 6/statement cycle withdrawal limit is waived during the coronavirus outbreak under Regulation D

  • Excessive transactions fee

    None

  • Overdraft fees

    N/A

  • Offer checking account?

    No

  • Offer ATM card?

    No

Terms apply.

Ally Bank Online Savings Account

Ally Bank is a Member FDIC.
  • Annual Percentage Yield (APY)

    1.85%

  • Minimum balance

    None

  • Monthly fee

    No monthly maintenance fee

  • Maximum transactions

    Up to 6 free withdrawals or transfers per statement cycle *The 6/statement cycle withdrawal limit is waived during the coronavirus outbreak under Regulation D

  • Excessive transactions fee

    $10 per transaction

  • Overdraft fees

    $25

  • Offer checking account?

    Yes

  • Offer ATM card?

    Yes, if have an Ally checking account

Terms apply.

How do you deal with obstacles that may get in the way of building your nest egg?

Building your nest egg is often easier said than done. Woodruff-Santos took her nest egg from $70,000 to $700,000 by the time she turned 33. She was very intentional with her income during that time, and she was able to take advantage of additional compensation benefits at every new job she started, including asking for equity and sign-on bonuses.

She also contributed 15% of her income to her 401(k) account each pay cycle, and put up to 20% of her income toward savings. And when it came time to pay for her wedding, Woodruff-Santos and her then-fiance chose to live with his parents for around six months in order to save on rent and stash away another $11,000.

But no matter how many expenses you slash and how many side hustles you take on in order to get closer to your goal of quitting your job, there are just some costs that may feel like they're threatening your progress.

Maybe you're asked to be in a friend's wedding party, or perhaps a family member has reached out to ask for some financial help with a large expense. On the one hand, you could make your friend or family unhappy if you don't help, but on the other you might feel discouraged and even a little stressed out if spending the extra money means you fall behind on your own financial goals.

"You need to be clear on your values and accept the fact that you're on your own path, and it may not look like someone else's," Woodruff-Santos explains. "It may mean you turn down those invitations to join a wedding party, and that's something that can be really uncomfortable. But reminding yourself that you don't want to put someone else's goals ahead of yours all the time can help you stay on track."

Bottom line

Quitting your job is a big decision and a huge milestone. If you aren't in a dire situation where you need to leave right away, it can be very helpful to create a well thought-out plan for how you'll maintain your financial security once you make your exit.

This can be especially true if you plan to leave your 9-to-5 to focus more on entrepreneurship, which often comes with some additional hidden costs — like equipment, software and potentially office space — you'll need to be able to pay for.

Once you've got a good idea of how much money you should save up, make a plan to build that nest egg in a high-yield savings account. It will take some time, and there are bound to be some unexpected expenses along the way that may leave you feeling discouraged, but remaining diligent and intentional with your money can pay off in the long-run.

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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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