Financial Answer Center

IMPORTANT NOTE: We have not included investment income or inflation in these calculations. These factors will have a slight impact on your own calculations. Obviously, the longer the time period, the greater impact earnings and erosion of purchasing power will have on your principal. Since we're targeting a career transition that should be complete within 2–3 years, both these factors should not be of major importance. The savings used for the following calculations are considered to be liquid; that is, they are in a money market fund or can quickly be converted into cash with minimal loss of principal. Do not use extremely illiquid assets or high-risk assets in your own calculations. If you do, you might not be able to meet your projections of monthly income.

When you're creating a career transition fund, the first question to ask is, how much money is enough for the transition you plan? It will probably take some time to save that amount. You can reduce that time by saving money in your monthly expenses, and by earning extra money. You may also save money by using your time more effectively in your planned transition. You also need to decide where your savings should go.

How Much Money Is Enough?

Whether you're saving for retirement, a vacation, a new home, or your children's college education, one of the first things you need to ask is, "How much money do I need?" Saving for a voluntary career transition is no different. The following examples will help you do your own calculation.

Chris and Laura Davis

Laura Davis wants to go back to school to become a teacher. She currently earns $2,000 a month, as does Chris. Their monthly expenses total $3,000. Laura needs to go back to school to get her teaching certificate and has decided to study full-time for two years. Tuition, books, and other school-related expenses for the two years will be $15,000. The Davises have $20,000 in savings. They would like to know how much money they should have in the bank before Laura can leave work. They also want to calculate how long it will take them to save that much.

The Davises' calculation is as follows:

Stage One Calculation: College Cash Flow Calculations (Laura in school)

MONTH	1	2	3	…	23	24
INCOME	+2,000	+2,000	+2,000	…	+2,000	+2,000
EXPENSE	-3,000	-3,000	-3,000	…	-3,000	-3,000
CASH FLOW	-1,000	-1,000	-1,000	…	-1,000	-1,000
IMPACT ON SAVINGS	-1,000	-2,000	-3,000	…	-23,000	-24,000

With a $1,000 per month negative cash flow, the Davises will need $24,000 just to handle their living expenses. They will also need to have an estimated $15,000 in college-related expenses. Therefore, the total amount they need is $39,000 ($24,000 + 15,000). To avoid putting themselves in financial jeopardy, the Davises have decided to round this number up to $45,000. This means they'll have a two-month emergency reserve fund ($3,000 x 2) to handle any unexpected cash needs.

Stage Two Calculation: Additional Savings Period

Each of the Davises currently earns $2,000 a month. Their savings calculation is:

MONTH	0	1	2	3	…	24	25
INCOME		+4,000	+4,000	+4,000	…	+4,000	+4,000
EXPENSE		-3,000	-3,000	-3,000	…	-3,000	-3,000
CASH FLOW		+1,000	+1,000	+1,000	…	+1,000	+1,000
SAVINGS	$20,000	21,000	22,000	23,000	…	44,000	45,000

Based upon the above calculations the Davises will need to save for 25 months. (If we factored in interest and other investment earnings, we might reduce it by 2–3 months).

How to Save Time by Saving Money

After completing their calculation, the Davises decided that they didn't want to wait almost two years for Laura to start school. Upon reviewing their expenses, they were able to find $250 a month in expense savings.

Their revised calculation is as follows:

Stage One Calculation: Revised College Cash Flow Calculations (Laura in school)

MONTH	1	2	3	…	23	24
INCOME	+2,000	+2,000	+2,000	…	+2,000	+2,000
EXPENSE	-2,750	-2,750	-2,750	…	-2,750	-2,750
CASH FLOW	-750	-750	-750	…	-750	-750
IMPACT ON SAVINGS	-750	-1,500	-2,250	…	-17,250	-18,000

With revised monthly expenses of $2,750 versus $3,000, rather than needing an additional $24,000, the Davises only require an additional $18,000. Unfortunately, they still need to have the $15,000 in college-related expenses. But the total amount now required is reduced from $39,000 to $33,000. Again, just to make sure they don't put themselves in financial jeopardy, they are rounding the number up to $40,000.

Stage Two Calculation: Additional Savings Period

Chris and Laura are each still expecting to earn $2,000 a month. By immediately reducing their expenses $250 per month, their savings calculation is:

MONTH	0	1	2	3	…	15	16
INCOME		+4,000	+4,000	+4,000	…	+4,000	+4,000
EXPENSE		-2,750	-2,750	-2,750	…	-2,750	-2,750
CASH FLOW		+1,250	+1,250	+1,250	…	+1,250	+1,250
IMPACT ON SAVINGS	$20,000	21,250	22,500	23,750	…	38,750	40,000

By concurrently reducing their monthly expenses by $250 and increasing their savings by that same amount, the Davises were able to shorten the savings period to only 16 months.

How to Save Time by Earning Extra Money

A 16-month waiting period still did not satisfy the Davises. They realized that in addition to reducing their monthly expenses, they could also shorten the savings period by increasing their earnings. Chris talked to his boss and decided to work some overtime, which added $200 a month to his salary. Laura found a second job on the weekend that she would keep while going to school, adding another $400 a month. Their revised calculation is:

Stage One Calculation: Revised College Cash Flow Calculations (Laura in school)

MONTH	1	2	3	…	23	24
INCOME	+2,600	+2,600	+2,600	…	+2,600	+2,600
EXPENSE	-2,750	-2,750	-2,750	…	-2,750	-2,750
CASH FLOW	-150	-150	-150	…	-150	-150
IMPACT ON SAVINGS	-150	-300	-450	…	-3,450	-3,600

During the two years Laura attends school, the Davises will have increased their earnings from $2,000 to $2,600 a month. With revised expenses of $2,750 a month, their monthly shortfall will be reduced to $150. That means they'll only need an additional $3,600 plus the $15,000 in college-related expenses. The new total amount they need is only $18,600. The Davises still want to play it safe and round the number up to $25,000.

Stage Two Calculation: Additional Savings Period

Since Laura will begin earning an additional $400 a month in her part-time job immediately, her total monthly income will increase to $2,400 a month. Since they still plan on reducing their monthly expenses immediately, the savings add up quickly:

MONTH	0	1	2	3
INCOME		+4,600	+4,600	+4,600
EXPENSE		-2,750	-2,750	-2,750
CASH FLOW		+1,850	+1,850	+1,850
IMPACT ON SAVINGS	$20,000	21,850	23,700	25,550

Look at the results. The Davises will need to save for only three more months before Laura's career transition can begin.

How to Save Money by Using Your Time

Chris and Laura sat down one more time and decided they really didn't want to make some of the sacrifices that would be necessary in order to reduce their expenses. Laura decided she would rather attend night school for one year; reducing the amount of time she would need to be in school full-time to only eighteen months. Also, she would not take a part-time job until she was a full-time student. The Davises revised their calculations:

Stage One Calculation: Revised College Cash Flow Calculations (Laura in school)

MONTH	1	2	3	…	17	18
INCOME	+2,600	+2,600	+2,600	…	+2,600	+2,600
EXPENSE	-3,000	-3,000	-3,000	…	-3,000	-3,000
CASH FLOW	-400	-400	-400	…	-400	-400
IMPACT ON SAVINGS	-400	-800	-1,200	…	-6,800	-7,200

While Laura is a full-time student, the Davises will have earnings of $2,600 a month and expenses of $3,000 a month. With a $400 monthly cash shortage, the Davises will need $7,200 plus the $15,000 in college-related expenses, making the new total amount only $22,200. Tacking on some emergency reserves, they'll need $29,000.

Stage Two Calculation: Additional Savings Period

Since Laura will be going to school at night for the first year, her total monthly income will remain at $2,000. Charlie's monthly salary will be $2,200 a month, since he agreed to keep the overtime. Their savings at the end of year one is calculated as follows:

MONTH	0	1	2	3	…	11	12
INCOME		+4,200	+4,200	+4,200	…	+4,200	+4,200
EXPENSE		-3,000	-3,000	-3,000	…	-3,000	-3,000
CASH FLOW		+1,200	+1,200	+1,200	…	+1,200	+1,200
IMPACT ON SAVINGS	$20,000	21,200	22,400	23,600	…	33,200	34,400

By saving $1,200 a month the first year, the Davises will have $34,400 in the bank. This is more than adequate, and Laura can start her career transition immediately. However, it will take her two and a half years to get her degree.

The various approaches taken by the Davises are meant to show the impact that increasing income and reducing expenses can have on the length and commencement of your career transition period. Of course, everyone's needs are unique. Try some of your own calculations.

Where Should All the Savings Go?

The best place to put your savings could be in a money market fund. Since your funds have a short time horizon (less than three years), you want to avoid the short-term volatility associated with stocks and bonds. Although you want your money to work as hard as you do, there's no reason to take unnecessary risks.

Although we have been doing a lot of calculations involving income, expenses, and savings over two- and three-year periods, we have not discussed pay increases, interest on your money, or inflation. There's a good chance that you'll get a pay increase and your expenses will go up, no matter how hard you manage to keep them under control. Since it is not uncommon to experience positive and negative changes, we recommend you monitor your plan every month.