The Question: How Much Money Do I Need to Have Saved Before I Quit My Job?
The Answer: Exactly $28,436.26
If you’re scratching your head right now and the thought, That’s Bullshit is running through your mind, good for you! Read on…
- Also Known As: Reserve fund, Rainy-day fund, Emergency fund
- Often Used For: Retirement, Education, Vacation, “Big-Ticket” Purchases
For our purposes, we’re talking about the chunk of money you want to have in the bank when you quit your job and launch your own business. This is the money that’ll support you until your new biz gets off the ground and starts bringing in a steady income.
The Scenario: You have a full-time job. You want to quit, and the sooner the better. You have an idea for starting your own business. Maybe it’s brick-and-mortar, maybe it’s online. Whatever the case, it’s tough to start a new career while you’re still chained to the job you want to leave behind. This is the situation Scott and I find ourselves in, and if you’re in the same boat, inevitably this question will come up:
How much money do I need to have saved before I quit my day job?
There are two tons of financial gurus out there who make their living spewing advice all over folks like us. Many of them seem to like to give one-size-fits-all answers such as: You should have six months of living expenses saved before quitting your job and starting your new business. A lot of them like the 6 month thing. What the hell’s so magical about six months? Not much. Other “experts” will tell you to save a year’s worth of expenses before singing Take This Job and Shove It. I really don’t see how 12 months is any more magical than six months.
I’m not a financial expert. I’m not specifically qualified to tell you that if you have $28,436.26 in your savings account, you can proceed to quitting your job and survive it successfully with no financial problems. But the truth is that this figure is just as legitimate as any other one-size-fits-all answer.
What I can do is suggest some things that you should consider when making your own decision about when is the right time to quit. I’ll start with the most important factor, and the reason why I refuse to buy into the one-size-fits-all formula:
You, and Your Situation, are Unique.
Are you planning to start a business selling a product or service for which there is high demand? Or have you pinned your hopes of entrepreneurial success on the sales of your wedding gowns for poodles? Maybe you’ve worked in management for 15 years, have a Masters Degree in Marketing, and want to pursue internet sales and consulting. On the other hand, maybe you’ve been a greeter at Wal-Mart for 10 years, have no business experience, and you’re looking at more of a “learning curve” to get your business off the ground. Especially if you’re selling wedding gowns for poodles. You get the point. There are a lot of variables that will determine how long it will take you to get your new business bringing in enough money to equal – or surpass – the old ball & chain job you’re leaving behind. The longer it takes, the more of a nest egg you’re likely to need. The trick, then, is to take an honest look at your own situation and determine – to the best of your ability:
- How much money you’ll need to survive the period in-between quitting your current job and making enough money to support yourself with your new gig.
- How long you will likely need to survive off your nest egg while launching your new business.
To do this, you’ll need to take into account yourself and your business idea. Read on for some important questions that will help guide you towards figuring out how big your nest egg should be.
1. What will your monthly budget look like?
Make your future budget. What recurring expenses will you have once you quit your job? Account for everything: Mortgage, credit card bills, utilities, car payment, alimony, hush-money. You get the idea. Don’t forget the monthly expenses for your new business!
Also, keep in mind that some of your current expenses will change as a result of quitting your day job. If you’re planning to work from home you may spend less on gas or you may be able to fire the baby-sitter. If you have insurance through your employer, you may want to buy your own policy when you quit. If so, find out how much it’ll cost you. When you finish making your budget, you’ll have a general* idea of the minimum* amount of money you’ll need, per month, to survive after you quit your job
(*You will underestimate some things, and there will be expenses you didn’t anticipate. But your projected budget will get you in the ball-park if you’re thorough).
I know, I know. Making a budget is ‘bout as much fun as a root canal. But, it IS ABSOLUTELY NECESSARY. DO THIS NOW. Go ahead. I’ll wait…
Done? Awesome. Now that you have a general idea of what your living expenses will be, you should also consider whether you plan to work a part-time gig while launching your new business, or whether your nest egg will be your only guaranteed source of funds.
If your estimated future budget made you lose consciousness, grab a paper bag, breathe deeply, and read on…
2. Do you have any current expenses you could reduce and/or eliminate in order to reduce your future need?
The trick here is to be honest with yourself about what you’re willing to sacrifice – temporarily – to reduce your living expenses. If you’re paying for 710 premium cable TV channels, could you (would you be willing to) reduce your need and survive on only 300 channels for a while? Are you willing to cut your own grass and stop paying someone else to do it? Take a look at your current expenses and see what you’re paying for that could be reduced or eliminated. Then, ask yourself if you’d be willing and able to do without that expense temporarily. The trade-off: If you reduce your living expenses, you also reduce the size of the nest egg you’ll need. Now’s a good time to compare auto insurance rates and find a cheaper cell phone service.
3. How much will it cost to launch your new business?
Will you need to pay rent on a building? Hire an accountant? Purchase inventory? Think hard and try to account for even the “minor” start-up expenses. They add up. Will you need an additional phone line? What about advertising?
4. Are you ready to launch your new business?
Do as much as you can to prepare for launching your new biz BEFORE quitting your current job. You don’t want to waste your first month as a Quitter setting up your home office. If you know you want to learn how to use QuickBooks so you can do your own accounting, learn now – not after you quit your job. When you quit your job, be ready to “hit the ground running.”
5. Do you have a back-up plan?
Business-types call it a “contingency plan.” If your business plan (you do have one, right?) doesn’t work out like you expected, what are you going to do about it? How quickly you can implement your back-up plan and bail yourself out of trouble will affect how big of a nest egg you need. If you see things turning South, have a contingency plan that you can put into action quickly and start getting some cash coming in – at least until you’re over the hump. For a lot of people, a contingency plan may involve re-entering the rat-race (a.k.a. traditional workforce) on a temporary and/or part-time basis. If that’s your plan, consider the next question carefully.
6. Can you get another job quickly, if needed?
Pardon me while I get all pessimistic for a minute. What if your business is dead in the water and you’re broke after 6 months? If you’ve been a doctor for 15 years, you should have no problem re-entering the workforce if your start-up doesn’t exactly start up. However, what if you’ve always worked in construction and all the construction companies in your town are going out of business because the economy is in the crapper and nobody’s building new houses right now? Assess your skills, work history, education, and resume. If it would take you a few months to find a “regular” job, you may want to take that into consideration when determining the size of your nest egg.
7. What will you be tempted to spend your “nest egg” money on – other than what it’s there for?
Are you disciplined enough to use your reserve funds only to pay your monthly expenses? If you answered “yes,” you’re either a rare breed, or the more common breed, humanis indenialum. Ok, complete this sentence: If I had an extra $2,000 – I’d just have to spend it on _____________. If you’re saving a nest egg now, chances are when you quit your job, you’ll probably have a bigger chunk of “extra” money than you’ve ever had before. Be honest with yourself. If you know you won’t be able to resist the bus-sized plasma TV, plan for it ahead of time – or figure out how to get over it. If you know you’ll give in to temptation, you’ll need a bigger nest egg to support your impulse-buying habit.
8. How will your life (and finances) change in the next year?
Is your car on its death bed? Is your roof leaking? Are you planning to start a family? Think of what big expenses might be coming your way and take that into account when planning the size of your nest egg. Better yet, if you know you need another car, it may be better to get it before you quit your job – especially if you’ll need a loan. Financing will be more challenging if you don’t have a steady income to show on your loan application.
9. Have you taken a vacation lately?
Ok, so you have a nest egg and you’ve quit your job with plans to work from home. You’ve entered the land of perpetual Saturdays. If you’re one of those folks that has gotten truly burned out and you’ve had your ass kicked by the 40-hour work-week, you may be tempted to look at this as a vacation. Will you be tempted to dip into your nest egg to fund a cruise to the Bahamas? If so, be honest with yourself about it. Plan for it, save for it, and enjoy the trip! Otherwise, get in your final paid vacation through your employer and enjoy the hell outta’ that too. I personally like the idea of taking a (planned & budgeted) vacation between quitting and starting a new business. Clear your mind, get refreshed and re-focused on the task ahead so you’re ready to pour your heart and soul into your new venture!
10. This one’s all yours.
Think about your personal habits, strengths, and weaknesses. Think about your unique situation and business idea. What else would you add to this list?
Comment below and tell us your #10
A Few Other Tips
- If you have any medical problems and you’ve been avoiding addressing them, now’s the time. You don’t want to get slapped with a huge unexpected medical bill a week after quitting your job. Get it checked out, if it’s something that needs treatment, do it while you have insurance through your current employer.
- Keep a list of things you need to get done in preparation for your launch. Check off as much of this list as possible before you quit.
- If you’re a chronic worry-wart, plan for your worst-case scenario (it’ll reduce the stress of quitting and the fear of the unknown). What’s the worst that could happen – and what would you do about it if it did happen?
Thanks to reader “CreativeHedgehog” for
suggesting this topic through Skribit