The first step towards planning a Year Off and figuring out the financial aspects is to calculate your income and expenses. Before figuring out where to go and what to do, it’s important to take the necessary financial steps and make sure you’re in good financial health before leaving your job to travel for a year.
First order of business….. calculate your income and expenses.
Why calculate all your income and expenses? Having a good idea of your income and expenses is very important for setting a monthly budget and as you will see, calculating your Year Off Age, the age you will begin your Year Off.
I think it’s important to be debt free and have a good start on your retirement savings before taking a Year Off. That’s a large amount of money you need to save. The goal is to add a lot more money to your bank account than you subtract for expenses. You need to save a large chunk of money EVERY MONTH for an extended period, probably years, which is why delayed gratification is so important.
The quicker you’re able to save the money you need, the sooner you’ll be able to take your Year Off.
Let’s take a look at your yearly income first.
It’s a good idea to have a fairly accurate figure here, and it’s important to look at your NET income, your income after taxes, health insurance premiums, and 401k deductions. Check your pay stub. This is the amount of money that gets deposited into your bank account every pay period.
Multiply that figure by how many pay periods you have per year. If you get paid every two weeks, multiply by 26. If you get paid weekly, multiply by 52. This figure is your NET YEARLY INCOME.
A few things I recommend not including in your Net Yearly Income calculation are tax returns, investment income, and money from side jobs. While these are significant amounts of money for some people, they are variable from year to year so don’t include them here.
Next up is figuring out your expenses.
This is the biggest pain in the butt to figure out, but once you do, you’ll have a good idea of what you spend money on and areas where you can lower your spending. Once again, the goal is bring home a lot more money than you spend.
There are four main expenses you have: your daily expenses, your weekly expenses, your monthly expenses, and your yearly expenses. Start an Excel spreadsheet or Apple Numbers spreadsheet to track all these, and try to come up with a dollar amount for each one. Look at past bills and credit card statements to come up with an average for the expense.
Figure out your yearly expenses first.
- car insurance
- car registration
- renter’s insurance
- yearly professional association dues or yearly professional license fees
- magazine subscriptions
- credit card yearly fees
- any other once yearly fixed expenses (mine include league fees for a baseball league I play in, Cincinnati Reds season tickets, and professional liability insurance)
- all other unplanned, non-fixed expenses – these include new clothes, car maintenance, vacations, doctor’s visits, etc. These are probably the most difficult expenses to figure out, but do your best to estimate these.
Once you have a ballpark estimate, add another $500 or so to this figure so you’re overestimating and not underestimating it.
Add all these yearly expenses to get your average yearly cost of your yearly expenses. Write this figure down on a piece of paper.
Figure out your monthly expenses next:
- rent or mortgage
- electric/gas bill
- water/sewage/trash bills
- cable/internet bill
- cell phone bill
- prescriptions/medications
- gym memberships
- monthly subscriptions (Netflix, HBO Now, Spotify, etc.)
Once you have all these dollar amounts figured out, multiply by 12 to get the average yearly cost for your monthly expenses. Write this figure down on your piece of paper.
Do not include student loans or any other non-mortgage debt like credit card debt and car loans. While these are monthly payments you have to make, we’re going to factor this into a later calculation because you need to look at this from the big picture stand point. This debt has to disappear completely before your Year Off so you need to look at it from this perspective and not the perspective of a monthly bill.
Figure out your weekly expenses next:
- groceries
- gas
- restaurant/bar tabs
Once again, estimate these as best you can, then add some money on at the end to over-estimate this figure. Look at your credit card bill and average out the last 10 times you spent money on gas and groceries. Once you have a weekly estimate, multiply by 52 to get your average yearly cost for your weekly expenses. Write this figure down on your piece of paper.
And finally, figure out your daily expenses:
- bus fare
- parking
- Starbucks coffee/Mountain Dew/Snickers
Figure out how much money you spend on these daily things then multiply by 365. This is the total yearly cost of your daily expenses. Add this to your sheet with your other figures.
Now add up the total yearly costs of your yearly expenses, your monthly expenses, your weekly expenses, and your daily expenses. This is your NET YEARLY EXPENDITURES.
You have now figured out two of the most important dollar figures for your Year Off, your Net Yearly Income and your Net Yearly Expenditures. These dollar figures will ultimately decide when you take your Year Off, how long you’ll be off work, and what exciting adventures you’ll get to take.
The goal is once again to maximize the difference between your yearly expenditures and your yearly income, so you can maximize the amount of money you’re able to save to pay down debt, accumulate some retirement wealth, and save up enough money to finance your whole Year Off.
If you completed this exercise, congratulations! You were able to calculate your income and expenses, and you took the first step towards an incredible year of travel!
Also remember that you can adjust these two figures. It’s always possible to make more money or cut back on certain expenses so you are saving more.
And always keep delayed gratification in the back of your mind. It will be your best friend if you plan on taking a Year Off!
Next order of business…….. calculate your Year Off Age.
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