Financial foundation for a life change (read this before you quit your job)
Financial stages explained, absolute must-knows and absolute no-gos
Like it or not, money matters. All the more if you would like to quit your job and follow a completely different career path, move abroad, start “digital nomading” or just take a few months off to figure things out. If you’re planning a big life change, it is super important to know where you’re at financially. You will often hear promises of how you just need to fix your mindset, take the leap, quit your job and then things will fall into place, you’ll create “financial freedom” in six months with drop-shipping or something. Which sounds great. And it is often a dangerous lie and borderline irresponsible. Bullshit alert goes off.
In this article, I'll help you figure out where you’re at financially, what it realistically costs to quit your job and what “financial freedom” actually means.
But first, a big fat disclaimer. None of this is financial advice. The purpose of this article is to give an overview over the various stages of personal finances. You are the only person who knows them. I don’t. That’s why I can only give you a framework. You are a grown-up and I trust that you’ll be able to make your own decisions.
For me, there are roughly four stages. And you are in one of the four.
Financial foundation, financial stability, financial wellness and financial freedom. They build on each other and you typically can’t skip the first two to get to the third. And it’s totally possible to regress back to earlier stages, so keep that in mind. The path to financial freedom is not a one-way street.
Financial foundation
But let’s start at the beginning of the financial journey. Being in this stage means you have a regular income, this is your financial foundation. That regular income covers your costs. You know your fixed costs per month, you have a bit of wiggle room for expenses like clothes shopping, occasional traveling, birthday gifts, a hobby, going to the movies and drinks and dinner meetups. Whatever you enjoy doing in your free time.
You have an extra account and are able to put a little bit of money aside each month. Ideally, you do this at the beginning of the month, not at the end. Pay yourself first, don’t wait if there’s something left over at the end of the month.
This money goes into an emergency fund. Aim for at least 1,000 USD / EUR to start. Once you have that, you can start thinking about a savings account aside from that. Savings are for bigger joys like international travels, a new car, any bigger investment for your hobby etc. The stuff that’s not necessary for life, but makes it more enjoyable.
If you can’t put money aside, there are only two ways to change that. Increase your income or lower your costs. It is smart to do a sanity check of your fixed costs from time to time. Especially if you feel like money disappears and you don’t know where it’s going.
Track your expenses. It’s not fun, I know. But you know what’s even less fun? Being broke. Either use a good old piece of paper and write down all your expenses, the notes app on your phone, an app or a spreadsheet. And write them down. All. Of. Them. Every coffee, every little shopping trip to Amazon, the cute decorative pillow cases, the cheap earrings, that one top you had to have, the latest skincare product you saw on TikTok, the subscription to any apps, even if it’s just 1.99 EUR per month. Netflix, Spotify, everything. Small expenses add up.
Eliminate what you don’t need. If you can’t save money, you cannot afford these things. It is that simple. They are lifestyle creep driven money-sucking vampires that drain your wallet and will keep you in this stage. Avoid credit card debt with ridiculous interest rates at all costs. If you already tapped into that trap, pay that off first. I totally understand the desire for more and I am not a fan of completely denying yourself any joy. Life is short, joy often costs money and sometimes we just have to say “fuck it” and have fun. It is however so much more fun if you have money and don’t have to worry about it.
But it is what it is, it usually takes a while to get there. And by “a while” I mean years. Be patient, pay attention to your money. And be aware of the price you pay for not paying attention. Not moving on to the next stage.
Money is brutally honest. It’s plus and minus. And if the numbers don’t add up, they don’t add up. No secrets. You’ll be in this basic stage until you are able to put money aside.
If you are in this stage, you are probably not ready to quit your job and turn your life upside down. Unless you plan to live in a monastery where your costs are covered or something similar. But even then - there will be a time after that and you’ll need money then, too. So this is not the time to take big leaps in my opinion. But if you’re determined, just be prepared for financial stress and mental misery - which can probably be avoided with a little patience. Dream big, but be realistic on the way, too.
Financial stability
Once you are able to put money aside, you can fill up your emergency fund to 3 - 12 months worth of your fixed costs. There is no absolute truth to how to calculate an emergency fund. Only rules of thumb. Some say you should use your net income as a measure and have 3 - 6 months worth of that. A higher income will obviously make it easier to save money, but it will also increase the risk that you fall prey to lifestyle creep and spend more money as soon as you make more money.
All of this largely depends on your personal circumstances and your income. If you have children or other financially dependent family members in your life, you’ll definitely need more than that. At the same time, this typically means that your fixed costs are higher to begin with, so it might take longer to get there. If you have a car, you’ll want to be prepared for unexpected repairs etc.
Apart from the emergency fund, you’ll need savings. Duh. Stating the obvious. These savings will secure your financial runway. That means how long you can go without income or less income and not go bankrupt.
Once you have enough savings, it is often the time when you start investing money that you don’t need immediately. Depending on your circumstances, you probably won’t have accumulated enough capital to buy real estate just yet at this stage. So investments might rather be in ETFs, some stocks or bonds etc. But this is more to give you a feeling for the stage you are at rather than a necessity for a life change.
Investments are important for later in life - and the older you are, the more urgent it is to start. In any case, your investment accounts are never part of your financial plan to quit your job. It’s money that is not at your disposal. It’s gone, working for you and not available. You should never ever have to sell stocks or any other assets in a bad market situation because you urgently need cash. Avoid this at all costs if you can. And if you need money to make the life change happen or you’re not sure, it is not the time to start investing a lot of money. You simply cannot afford this at this point. Stick to small amounts, paid monthly (compound effect!), and if it’s only 25 USD/EUR, that’s fine. But be absolutely sure you can spare the money.
Financial runway
To prepare for a life change that includes quitting your job, be sure to be absolutely clear on your future income situation. If you (plan to) have no income, e.g. because you are taking a sabbatical or you would like to travel for a few months between jobs, your financial planning will look very different than if you are building a business on the side where income might be there, but might be more volatile, or more or less steady. Again, depending on your situation. If your business can cover your costs consistently, you can start thinking about quitting. If you don’t know yet what the income situation will be, assume you won’t have any income. Better safe than sorry.
Don’t be optimistic
I had two big clients at the beginning of my freelance journey - money that would have easily doubled my former annual income in a few months. And then, from one day to the other, both projects that I was hired for imploded, because they both (independent of each other) couldn’t get funding for their growth stage. 2023 was a tough year, people. And boom, I had to correct my forecast from six figures to zero. Now, luckily, I had other clients coming in and everything went just fine, but for a few short weeks, I was looking at the tail end of my financial runway coming dangerously close. And the thing is, you don’t know in advance. Things can absolutely go sideways sometimes. And I can assure you, that is not a pretty outlook. And sitting at a beach in Thailand does not make up for any of these existential fears. I tested this for you. ;) So be smart here, you can be the most positive person in the world, but financial planning is not the place for optimism.
Changing fixed costs
Take into account that your fixed costs might change once you quit your job. They might get higher or lower. If you don’t move, you might save commuting costs and spend less money on buying lunch every day. If you move somewhere temporarily, you’ll have to add that rent, travel costs etc. I am stating the obvious here, but do your research on what you should expect. Hoping is great, knowing is better.
Find Facebook groups or podcasts, follow legit people on X, check out nomadlist.com to get a feeling for living costs in other countries if moving abroad is part of your plans. This is true for every stage, but if you’re here, it matters most, because you have the least financial buffer.
Financial wellness
Once you have a nicely filled emergency fund that holds enough money that equals ca. six months of your fixed costs (again, this is controversial and more realistic for most people is probably three months though) an income that gives you enough wiggle room to live a comfortable life, you have entered the financial wellness stage.
What a comfortable life looks like and how much money that requires is up to you. It’s hard to put a number on that, but you know it when you simply don’t worry about money. When you don’t talk about money, don’t think about money or what things cost, because there’s always enough. When you can just pay for stuff and your mind doesn’t go to the balance on your bank account.
Avoid lifestyle creep
This is the stage where you can save money relatively easily. This is also the stage where the lifestyle creep typically starts. If you want to save money, don’t fall prey to that. The biggest and easiest life hack to prepare for quitting your job is to live way below your means. If you want to quit your job, making your life more comfortable is not your priority. It is convenient to have someone clean the house, Amazon Fresh is awesome - and if saving time saves you money, great. Do it. If it doesn’t, don’t. It is that simple.
There is absolutely no point in looking rich to impress other people. It is much better to have money than to look like you have money. Money spent is money gone. Handbag for 400 USD/EUR? That’s a month’s worth of rent in Vietnam. Spa weekend for 1,000 USD/EUR? That’s a flight to a very nice beach. Make your choice. And keep your eyes on the prize.
That’s how I “measure” money. In my mind, I calculate “months in Southeast Asia”. Made 5k EUR gross income? Great, after tax and all, that’s roughly six months rent in Vietnam. Find your goal and start looking at money in these increments. It’s fun.
Investment vs. savings
This is the stage where you can start investing much more money. And you probably should start much earlier than you think. Investments are always separate from your savings account. Savings is money that is available. Savings are cash. Investments are not. Don’t mix them up mentally. Only ever invest money you don’t need in the short term. Decide how high your risk tolerance is and how much money you are willing and able to tuck away. If you wanna do day trading, fine. As long as you know what you’re doing and you can afford to lose everything.
For most people, investments are long-term investments with a 20, 30 years horizon. Retirement money, boring long-term commitments, investment in reasonably yield-bearing assets, well diversified over multiple asset classes. No secrets here either. The secret is to understand that you have to do it as early as possible in life and then actually do it. The best thing is to automate it, you can always adjust with two clicks. It’s not rocket science.
How much should be in your savings account?
Your invested money is for later, your savings are for today and your life in the coming months. So let’s look at that. It is super hard to give anyone any numbers to aim for. It depends so much on what your goal is, what your life change looks like, if you’re going to have any income or not. Let’s say, you want to quit your job and take a three month sabbatical in Thailand, you have halfway sought-after skills and no concrete plan what to do afterwards. You have zero income during that time and you don’t know how you’re going to make money after these three months yet. You have no fallback option like a husband, partner or wife who could support you financially. You are on your own, at least financially. You reduced your fixed costs back home as much as possible by e.g. renting out your place if you don’t own it.
My personal experience with what life and traveling costs, what food costs, what medical emergencies can cost (if your insurance doesn’t cover things upfront - and sometimes you have a stupid accident or catch Dengue fever and have to go to a hospital, life happens), I’d say make sure you have at least 10,000 USD/EUR in savings. This is the absolutest absolute bare minimum budget to quit and survive a few months in a country where you can live okay with modest standards and minimal spending and have some money left for a flight if you decide to leave, if you have to buy kitchen appliances, some new shoes, a hat and flip-flops, if you decide you want to learn surfing, have a few more drinks, take a trip to another island etc. - and have some money left afterwards. This won’t give you a great, comfortable life. But you can survive pretty okay for a few months. My benchmark however is always Germany and Southeast Asia - so take that into account. If you’re living in the US or want to start a life in Tokyo, good luck. This amount won’t get you anywhere. Again, do the math yourself.
Know yourself
And know yourself. You can’t fly economy? You don’t want to live in a simple hotel with famously hard Thai-style beds and a minimalistic shower? You deserve a massage at the beach every day? Spa treatments? You need to get your nails done twice a week? You need to bring tons of clothes and might have to pay for extra luggage on every flight? That’s all fine. No need to be horribly miserable. But these things cost money. If you are higher maintenance and you know you’ll be deeply miserable if you have to cut back on things you absolutely need to feel like yourself, make sure you have money to maintain that lifestyle. ;)
And then what?
Take into account that you’ll need money after these three months. This might sound obvious, but - again - sometimes, things are not as obvious to everyone. And sometimes, we don’t want to think too far ahead. So I’d rather insult your intelligence than leave you in the dark with open questions ;). Be smart and realistic. The goal is not to burn through all your savings. The goal is to have enough to live okay and figure things out - and survive after that time. Don’t go for bare minimum, aim for bare minimum plus comfortable wiggle room. That will let you sleep much better, I promise.
Make sure you are clear about if and how you are going to use the three months. Will you start looking for opportunities at the beginning or at the end of the three months? Are you completely open to relocating to any job anywhere in the world? Are you planning to go back to your home country and look for a new job in your town? Are you planning to work remotely? Freelance? And if yes, what is that going to look like? Do you want to keep moving from place to place - which can be exhausting and more costly. Or are you planning on settling somewhere nice? Maybe start a brick and mortar business somewhere? Or buy a business? Are you going to work in your profession or start out with something new entirely? Half-half? What are the chances of this working out? These questions are important to answer in your personal case.
Whatever you do, don’t move to la-la-land
It is hard to predict the future. And you might not be able to answer all these questions. And you might be hardcore optimistic and positive about the future, like me. And that’s great. Financial planning however is rooted in reality, not in hopes and dreams. The sooner you understand that the better. And the more likely you are to make it to the next stage. The magical stage of financial freedom.
Financial freedom
Living the dreams without any worries about money is for this stage. When you have done all the math, all the work, when all your investments are set up. You have acquired assets that provide income even when you don’t work. Real estate, dividend-paying stocks, a business etc. And this income pays for all your living expenses. At this stage, you’re worrying more about maintaining wealth and investing your money rather than saving it.
You are free to pursue any passions or projects. Financial freedom means you can choose to work. Or not. And you don’t necessarily need to be a multi-millionaire to achieve that. Depending on your expenses, your savings, your lifestyle, this can happen with a lower amount than you’d probably think. Again, you’ll have to do the math. How old are you, how many people are financially dependent on you, how high are your living expenses, what’s the monthly income situation (best case and worst case) etc.?
Most people dream of this and imagine how great it would be to sit at the beach drinking margaritas all day long. It gets boring pretty quickly however and you’ll end up as an alcoholic sooner than you think ;). Most people need something to do, want to create something, give back or leave a legacy.
At this stage, financial planning is more about tax optimization, asset management and structures. You don’t have to be where your money is. You need to keep an eye on cash flow though, this is important at any stage. If you’re investing too much, your money is tied up and if things go sideways, you won’t be able to operate and making any short-term changes will get much harder.
This might sound like a great problem to have. But it’s just as annoying and mentally taxing at any stage. And if you have higher living expenses now, this might hit you even harder. Even at this stage, modesty goes a long way. Especially for people who have never had money growing up, it is hardcore tempting to blast it and fully enjoy a totally new lifestyle. Buy houses and cars and all the fun toys. This is a dangerous path though. And everything I said about lifestyle creep is all the more true at this stage.
If you fall into the lifestyle creep trap, your life change won’t last long and you will have to go back to working a regular job if you’re not careful. Keeping money together is a skill and this is the stage to learn and master it. Contrary to popular belief, this is also a lot of work. And costs money, too. Unless you love taxes and spreadsheets and know a ton about structuring wealth in foreign jurisdictions, you’ll need to hire people who help you do that. Add that to your expenses list.
It is however the best feeling to wake up at a place that you chose and do the work that you choose to do. Because you want to do it, not because you have to do it.
I am not there yet, but I am getting a glimpse of what it’s like. And I am on the path. And I hope you are getting a feeling for what it takes financially and how much time it might take you to get there, too.
Everything starts with the desire to make a change. With the belief that it might be possible to quit your job and do something else. Add to that determination, perseverance and patience - and a solid financial plan! And quitting your job might turn into the first step on a long journey to financial freedom for you. The journey is long, it typically takes years before you can even think about quitting. Don’t believe anyone who tells you this can happen in six months. It’s a lie.
It’s okay to dream big. It’s great to want more. And it’s absolutely possible. There is however no secret path, no silver bullet and no magic pill. Between now and the dream to quit your job is a plan, work and time. And numbers that have to add up.
