Edits since March 30th 2020 are in this color.
This article was written when I was 24 and working as the CTO for Nuveda. Obviously, a 3 month salary was sufficient back then to take a calculated risk. But if you are not 24, you want to create a line of personal wealth. And especially if you are into business you want to grow your personal finance as much as your business finance.
Besides, there are other things like validating your rarity, figuring market-product fit and so many things you got to do to secure finance even before you quit a full-time job. And in that sense this article is so far from complete. But I am leaving this on the site anyway, to show how a ‘Good’ (planned) loan can assist in handling cash flow challenges.
Many times you may want to quit where your working because you have found another job or want to start something on your own. I have this tip to give you the financial freedom before you quit.
As a rule of thumb have atleast 3 Months of Current Salary in your Account! You never know what awaits you in the future. Before you think this is impossible in your current situation here is a trick to make it happen. No this is not about saving. Its about exploiting finance!
Lets assume your existing loans and lifestyle requires 1 Lakh a month.Then for 3 Months you need 3 Lakhs. Now go and get a loan for 3 Lakhs and make a Fixed Deposit. If you are earning to spend 1 Lakh a month 3 Lakh personal loan is easy. Before you judge, let me demonstrate the maths and prove that you actually end up making money and adding safetly to your situation(yes counting the interest).
Loan for 3 Lakhs: Reducing Interest of 15%: Emi is 10399 : Total Interest in 3 Years: 74385.6
Recurring Deposit 3 Lakhs: Interest 8.25%: Total Interest in 3 Years: 87815.73
Note: You are actually making a profit of 13000+.
What I am suggesting is not to be dependent on that money. If you are going on your own, you better be able to generate income from the first month. All that I am suggesting is that even if you believe that you are safe, it is safer to have 3 Months+ Salary in your bank all the time. And if you don’t end up using it, the money makes more money. If you don’t have the money for 3 Months+ salary, borrow money for that safety and money still ends up making money.
Every negotiation on your salary, on the rules and your decisions will benefit from such financial freedom.
Remember its difficult to take a loan just after quitting your job. So take the loan first, Secure it in a Fixed Deposit and then quit. That way if everything goes well, you made more money that you loaned. If everything doesn’t go well, you will have a breathing time of 3 Months! By the way, just think of what it will be like after those 3 years, you will have 4 months of salary to blow on a world tour, exotic vacation, Car, Investment, Feeding the hungry or whatever it is that you fancy now, even if you end up with no hike and just had an ordinary run.
On the recommendation of a friend, Raja Subramanian – I have now made it a personal target to secure 12+ months of finance as liquid cash. Not that I plan to quit but I like that kind of freedom.