Freedom Countdown

Archive for the ‘Personal finances’ Category

Before you take the big plunge and quit your day job, you need to take a very realistic look at how much after-expenses, after-tax money your passion will generate.  Then you need to prove that you can live on that amount.  The best way to do this is to set up a budget based on your passion’s income and live on it for 6 to 12 months as if it were your sole source of income.  Be brutally honest about your spending, don’t just make guesses as to how much you’re spending, or tell yourself you’ll start on this task next month when you don’t need new tires or some other unexpected expense.  You will still have financial surprises after you quit your job and you need to be prepared to handle them.

The easiest way to set up a budget is to utilize the online banking tools that many banks now offer.  Many will automatically group your transactions into categories like groceries and gas based on the vendor’s name.  Also, you can usually download your banking transactions to Quicken, QuickBooks, or the free Quicken Online service.  Once you have your transactions categorized, it’s time to set a budget amount within the online banking tool or Quicken/QuickBooks and begin monitoring your progress against your budget.

Another thing you should do before you quit your job is to begin building your six month cash reserve.  That’s your monthly expenses times 6 and yes, it will seem like a lot of money, so start now.   This is something everyone should do whether they are beginning a new business or not.  This isn’t your 401K, your child’s college fund, or your home equity;  it’s money sitting somewhere that’s easy to get to in case of an emergency like a layoff or illness.  Or in your case, a new business venture that doesn’t work out quite like you projected.

Finally, consider scaling back your lifestyle and getting out of debt.  It’s hard enough to start a new business as it is, without worrying about whether you’re going to lose your house or your life’s savings.  There are some businesses that are instant successes, but most need a year or two (or more) to grow into something that will support you consistently the way your career did.  If you’re lucky (or unlucky) enough to have investors you may be able to pay yourself a sizeable salary, but most small businesses don’t work that way.

I’ve been scaling back my lifestyle and getting out of debt for the last several years, but it’s time to get serious about the budget.