In this guest article, we welcome Jake Northrup, founder of Experience Your Wealth LLC, who gives his insights into manageable financial planning for a family sabbatical. He presents a three-month sabbatical example for a family of four, which could be scaled up or down to be tailored to a range of scenarios, whether you’re going solo for a month, or with a bigger family for a full year.
One of the most encouraging recent trends in the workforce is more people abandoning the ‘nine-to-five, work-until-you’re-65’ concept. With enhancements in technology, we are no longer forced into the traditional corporate structure. You can now build your career so you can work when you want, where you want and how you want in a way that wasn’t possible 30 years ago.
Rather than deferring your life and passions until age 65, we can now experience our life more along the way. What is one of the best ways to take advantage of this? A sabbatical.
Taking extended time off from work is both exciting and terrifying. It may feel like a pipe dream and often times we blame money as the reason we can’t do it. It’s easy to say, “we can’t afford that!” without really diving into how a sabbatical would impact your financial future.
If you are truly serious about taking a sabbatical, you can make it work for your family without uprooting your entire financial life with proactive financial planning.
As a financial planner, here is my advice to make that sabbatical possible using an example of a young family of four looking to take a sabbatical.
Estimate the cost of your sabbatical using a 5-step approach
Step 1: Identify the ‘when’ and the ‘where’
In order to create a ballpark estimate for the cost of your sabbatical, you’ll need to answer some key questions first.
- How long do you want to plan to travel for?
- What countries or regions do you plan on visiting?
The length of time will likely depend on many factors – your comfort, professional schedules, kids’ schedules, etc. For this example, we will assume that you and your partner agree upon three months during the summer so you don’t have to pull your kids out of school.
Once you decide on your three months, it’s time to discuss where you’ll want to be. There is a massive cost difference between spending time in Southeast Asia vs. spending time in Australia or New Zealand. While you don’t need to narrow down exactly what countries you’ll be in (thus leaving yourself the ability to be spontaneous!), it is important to know the regions of the world you want to be visiting and understand the cost differences.
For this example, we will assume that you and your partner decide on starting in Europe for a month, then transitioning to Southeast Asia for a month and then spending the last month in South America. This is important because then you can plan for the first third of your trip in Europe being more expensive than the remainder of your trip in Southeast Asia and South America.
Step 2: Identify your current lifestyle costs
Your cash flow is the heartbeat of your family’s finances. Without the awareness of how much you are spending and where money is going, you’re making crucial financial decisions in the dark.
You can start tracking expenses using applications like Mint.com or YNAB. Using one of these applications doesn’t mean you are putting your family on a strict budget; it simply means you are bringing awareness to how much it costs to live your lifestyle and where your money is going.
This allows you to then create a starting point for your projected sabbatical expenses.
We will assume that your family spends an average of $10,000 per month.
Step 3: Identify what costs you still incur back home while you are travelling
Now that you have the spending data, you can dive a bit deeper into where that $10,000 per month is going. Ask yourselves what expenses will we still incur while travelling? Common expenses will include:
- Debt payments
- Insurance premiums
These will be your ‘non-discretionary’ expenses that stay pretty consistent month by month.
We will assume of the $10,000 per month, $4,000 will still occur even while you are travelling.
Step 4: Identify the extra costs you will incur during your sabbatical
This step will take the most work and contain the most assumptions. You won’t be right, but you want to have some ballpark estimate as a starting point. Common expenses will include:
Some of this will be relatively easy to forecast ahead of time – flights, lodging, transportation, etc. However, you likely won’t know the food, excursions and shopping costs until you arrive there.
We will assume that you will incur an extra $15,000 in Europe, $10,000 in Southeast Asia and $10,000 in South America. I strongly believe it’s better to overestimate here, as opposed to keeping it on the lower end. It will also vary greatly depending on the location.Read more: how much does it cost to travel the world?
Step 5: Add the costs from Step 3 and Step 4 to calculate your total estimated sabbatical cost!
The reoccurring expenses back home total: $4,000/month * 3 months = $12,000.
The expenses directly tied to your sabbatical total: $15,000 (Europe) + $10,000 (Southeast Asia) + $10,000 (South America) = $45,000.
The total estimated sabbatical cost = $57,000.
You may be looking at that $57,000 and think “oh crap, that’s a lot!” Well, the true ‘extra’ costs compared to living at home is $57,000 – $30,000 ($10,000/month * 3 months) = $27,000. However, you still want to plan on having at least $57,000 saved up in cash to financially support your sabbatical.
“The education that your children will receive from experiencing different people, cultures and food will go far beyond anything they can learn in a classroom.”
Create a separate sabbatical savings account and adjust your cash flow
Now you have your savings goal – you need to hit $57,000 in savings before leaving on the sabbatical. Sounds simple, right?
Well, you don’t want to spend your entire cash reserves on the sabbatical. So this $57,000 would be in addition to the minimum amount of cash that you hold for emergencies at all times. A common rule of thumb is to have one month of living expenses in a checking account ($10,000) and three months of living expenses in a high-yield savings account ($30,000). I don’t think it is prudent to use your emergency cash reserves for the sabbatical, although I know it is tempting!
Assuming you already have the $10,000 in checking and $30,000 in a high-yield savings (this should be your #1 priority before starting to save for the sabbatical!), then I highly recommend opening a separate high-yield savings account and naming it ‘sabbatical savings’. This way, you can keep your sabbatical savings completely separate from your other cash that you shouldn’t touch unless there was an emergency.
Now that you have your separate sabbatical savings account open and you know your $57,000 target, you should plan to adjust your cash flow accordingly. This may include:
- Spending less now
- Contributing less to retirement accounts
- Pausing savings for your kids’ college
- Postponing any major purchases (car, home renovation, etc.)
You may look at this and say “huh? A financial planner is recommending that you don’t save for the future?”
Let me tell you a secret. Pausing your long-term savings for a few years will not substantially jeopardise your financial future.
Money is simply a tool that if managed properly, allows you to live your ideal lifestyle. In addition, if you don’t buy into the whole ‘nine-to-five, work-until-you’re-65’ concept, it drastically changes the amount of money you need later in life.
I view a sabbatical as an investment into yourself, your family and your kids. It may not be one that results in the highest amount of money in the future, but it will be one that will result in the highest amount of meaningful experiences. In addition, the education that your children will receive from experiencing different people, cultures and food will go far beyond anything they can learn in a classroom.
I grant you permission – pause the long-term savings and boost up your sabbatical savings account to make this dream turn into a reality.
We will assume that your average monthly savings is $3,000/month and instead of funding your long-term investment accounts and kids’ college accounts, you funnel the savings into your sabbatical savings account. This means you will have enough saved up in $57,000/$3,000 = 19 months.
Leave your long-term investments intact
Although it’s okay to pause long-term savings for a few years, I do not recommend using your already-saved long-term money to fund your sabbatical. You don’t want to take a shortcut and withdraw money from your long-term savings accounts to fund the sabbatical which may result in penalties and tax.
This is why I recommend a bucketed investment approach. You separate your money into an a) 0–5 year bucket, b) 5–15 year bucket and c) 15 year+ bucket. Your 0–5 year bucket would remain in a safe high-yield savings account, whereas your 15 year+ bucket can be invested in equities for more long-term growth.
This type of structure will make sure your long-term investment strategy stays intact during your sabbatical, so you have the peace of mind knowing that you aren’t uprooting your entire financial future by taking the sabbatical with your family.
“It’s not about maximising the amount of money that you have, it’s about maximising your life.”
Plan your health insurance accordingly
Before you are ready to go, it’s critical that you speak to your health insurance company about the coverage that may be offered in different countries. The last thing that you want to have happen is an unexpected medical expense draining your hard-earned sabbatical savings because you didn’t plan accordingly for health expenses.
If your global coverage is limited from your current health insurance company, then you may want to explore the cost and coverage of expat health insurance. Although basic medical expenses may not be too expensive, you would be paying for the peace of mind knowing that the major medical expenses would be shared with an insurance company.
Purchasing expat health insurance will boil down to your personal preference. I don’t think it’s an expense that will prohibit you from taking the sabbatical, but not having it could be an expense that throws a wrench in your sabbatical plans if the medical costs are significant.
Key takeaways for financing a family sabbatical
- The most critical step in financially planning for a sabbatical is to first put together a ballpark budget. You are ideally looking for this to be directionally accurate, as opposed to exactly right. You may want to even want to add a ~10% cushion to your budget. If you don’t have a ballpark budget, it’s like going to the casino without a limit.
- Reframe a sabbatical from an ‘expense’ into an ‘investment’. It’s not about maximising the amount of money that you have, it’s about maximising your life. It’s okay to pause savings for the near future so you can experience a sabbatical – it won’t have a drastic impact on your financial future.
- It’s crucial to keep your emergency cash reserves and long-term investments intact. You don’t want to uproot your entire financial future to fund your sabbatical and feel like you are starting from ground zero upon returning.
- Talk to your health insurance company about the coverage offered in different countries. It may be worth exploring the cost of expat health insurance to fill any insurance gaps, so an unexpected medical event won’t ruin your plans.
None of the information provided is intended as investment, tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement, of any company, security, fund, or other securities or non-securities offering. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. The content is provided ‘as is’ and without warranties, either expressed or implied. Experience Your Wealth, LLC does not promise or guarantee any income or particular result from your use of the information contained herein.
If you found this useful, you might like more of our resources on sabbaticals:
- The ultimate guide to taking a career break | plan your sabbatical
- How to ask for a sabbatical from work
- Career break interviews