Tired of the Daily Grind? How to Financially Prepare to Take a Sabbatical from Work
Ready for some personal and professional rejuvenation? Learn how to prepare financially for a sabbatical, whether your company will embrace one or not.
Jealous of your former college roommate, who never seems to work? (As far as you can tell, he lounges poolside and still manages to make thousands of dollars per week.)
Just heard that your neighbor plans to take a year off to travel and develop his side gig?
Why not take a sabbatical from work if you can't stomach one more day of brown-bagging the same ol' lunch? In this article, we won't focus on the emotional and career benefits of taking a sabbatical from work (we'll leave that to you to figure out on your own). However, we'll focus on the potential financial benefits of a sabbatical and offer some financial pointers before you take the leap.
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Financial Benefits of a Sabbatical
You may not think of a single financial benefit for taking a year off — or any amount of time off, for that matter — without pay. However, that's not necessarily true, because it depends on what you actually choose to do during your sabbatical. Let's go over some potential financial benefits.
Benefit 1: Some companies continue to pay you while you're on sabbatical.
Some pay you, some don't. Some company policies completely prohibit sabbaticals, which may force you to quit and find another job after your time off. Some companies offer conditional sabbaticals, which means they may require you to do volunteer work or work that fulfills your company's mission statement. Take Patagonia, for example. The company allows employees to take part in what it calls its Environmental Internship Program.
In this program, Patagonia allows employees to keep their paycheck and benefits for two months from their regular roles as long as they work for an environmental group.
Other companies that allow sabbaticals may be less prescriptive — you may get lucky in your ability to sabbatical how you want and to recharge as necessary.
Check your company's policies, talk to your supervisor and find out whether your company will keep the paychecks coming during your sabbatical. (If it's allowed at all, that is.)
Benefit 2: Advancing your degree could increase your income later.
What if you took a year off to go to graduate school? It could enhance your professional skills and abilities. Your company may promote you for your advanced degree. A promotion would mean a higher salary, better retirement benefit possibilities and you could scamper toward retirement in a shorter period of time.
For example, let's say you take time off to earn a master's in business administration. The Graduate Management Admission Council's 2020 Corporate Recruiters Survey says that MBA graduates earn 75% more than their colleagues who don't have an MBA — a $115,000 median salary difference.
Benefit 3: Your business or side hustle could take off.
If you'd like to try building a business or side hustle using a skill you've always wanted to develop, you could tackle it during a sabbatical.
If you have an entrepreneurial spirit and always wanted to evaluate plants in the Amazon for their cancer-curing properties, your new business could make good use of your Ph.D. in botany and pharmacology (even if you've acted for the past dozen years as a marketing director for a research firm!). You might just find that cure!
However, prior to launching your sabbatical, ask your company's HR office about its non-compete clause. You don't want to destroy a career you may have to return to later, particularly if your business or side hustle flops.
How to Financially Prepare for a Sabbatical
Let's go over a few steps you can take to get yourself ready for a side hustle, particularly if your company won't allow you to stay on payroll.
Tip 1: Determine your expenses and income needs.
How much money will keep you afloat for the duration of your sabbatical? Naturally, this varies from person to person and depends on your debt load, expenses, dependent needs and more. You may want to consider outlining the amount you need way in advance.
You can use a budget calculator to help you total up your monthly expenses. Add in some cushion for expenses that might crop up — soccer fees, veterinary bills, new tires for the car, etc.
Tip 2: Save as much as you can ahead of time.
Your company may be willing to pay you a small salary or stipend. You might also be able to cash in on vacation time. However, the bulk of your income may need to come from your own supply.
Based on your monthly income needs, you may need to spend a considerable amount of time stockpiling your savings so you have enough money coming in during your sabbatical.
Tip 3: Consider the impact to your retirement savings.
Unless you cancel them, your retirement contributions should still continue with your employer if you're still collecting a paycheck from that particular employer.
You can set up a traditional or Roth IRA if you plan to earn income during your sabbatical. If not, however, you can't contribute to either a traditional or a Roth IRA. In some cases, married couples filing jointly might consider making IRA contributions based on the taxable compensation reported on a joint return.
Your spouse may also be able to float your retirement fund by contributing to his or her own fund if he or she plans to continue working during your sabbatical. However, note that you could lose out on up to a year of continued retirement savings for your own retirement. How much will that affect your retirement savings down the road? (Remember, the Rule of 72 really makes a huge difference!)
What other financial implications may you face during a sabbatical? Make a checklist and a plan before you announce your departure.
Prepare for a Break Ahead of Time
It's important to remember that a sabbatical traditionally doesn't mean that you laze around or spend all your days at the local movie theatre. A sabbatical provides an opportunity for you to focus on personal growth and professional enrichment.
Just make sure you consider the financial ramifications of opting for a sabbatical, particularly if your company won't continue with your paycheck.