I left my corporate job more than seven years ago, despite being very risk averse, especially with money. Since then, I’ve become a debt-free millionaire. And as a financial coach I’ve guided many new entrepreneurs into leaving their day jobs and starting their own businesses, by first helping them employ these important money management skills.
Consistently Complete A Monthly Budget For A Year
According to the U.S. Chamber of Commerce, 18% of small businesses fail within their first year and half of them fail within five years. During the Covid-19 pandemic, I coached many entrepreneurs who were ready to quit their businesses because of the economic conditions, but also because they did not have a clear grasp of their personal finances.
Most of my financial education students first think of budgeting as just what you need, but you also need to allocate money toward the variable expenses. This is especially true in order to prepare for unpredictable income as an entrepreneur, but also to maintain personal expenses like holidays, celebrations and vacations that are important to keep you from burning out.
A budget is a forward-looking document, not a look into the past. Every month’s budget should look different because you are not just allocating the necessities, but also everything you plan to spend money on when you become a full-time business owner. It’s also important to use this year to cut out any large, unnecessary expenses while you are growing your business.
By learning to treat your budget as a changing plan each month while you are still on a steady income from your day job, you’ll see after a few months that it isn’t meant to be perfect even when you can predict your paychecks.
Save Six Months’ Expenses For Your Business Burn Rate
In the tech startup world, founders ask investors for money to pay for their expenses while they try to make their company profitable, also known as a burn rate. Rather than thinking of this as just an emergency fund, treat yourself as an investor in your own financial future, not just a founder. This six-month fund should include your basic areas of expenses including:
- Housing
- Utilities
- Transportation
- Health care (including therapy as a new entrepreneur), and
- Food
You will want this cushion of time when you leave your job. Give yourself the runway to figure out how to pivot and evolve your business without having to worry about keeping your day-to-day living comfortable.
I’ve also witnessed many new entrepreneurs leap into projects without having enough contingency funds in place to run their businesses during bad months or unexpected lower revenue. Many startups will prepare for an 18-month runway, and they will often turn to investors or loans for those funds.
But if you’re starting a side hustle that’s not capital intensive or one that requires a large team, saving six months’ worth of runway is a great start, especially if you’re not adding interest to it by taking out loans. Include basic expenses to keep your business running (even if you have no income) such as:
- Internet and other software subscriptions like Zoom
- Marketing and advertising investments
- Industry memberships, business education and/or coaching
- Supplies
Pay Off Debt Including Your Student Loans
Many students I teach have high-paying jobs, but also have high student debt amounts, making it really hard to get comfortable with leaving a steady salary. According to Education Data Initiative, the average borrower takes 20 years to pay off their student debt.
If you have extra savings beyond your business runway, paying off all your debt — including your student loans — will shift your motivation from just meeting your expenses to truly growing your business as an investment.
Some financial experts might argue: “Why pay off the debt if it’s not accumulating interest, if it’s in deferment, or the interest rate is low?”
Mathematically, I understand the logic. But psychologically, the benefit of letting go of all those extra payment accounts, and losing the mental burden of student debt was more than I ever thought it would be. I chose to pay off $72,000 of student loans aggressively within a year before I leapt into my own full-time business.
It also gave me the confidence to make big financial decisions, and saved me several more years of dreading my student loans like many of my peers. After I made that last payment, I felt like I could breathe, think more clearly, and channel more creative energy into growing my business.
You Can Still Leave Your Day Job. You Just Have To Be Okay With Accepting More Risk
I’m not saying that you have to make these three money moves to leave your day job and grow your own business. If you have the confidence, then more power to you.
But if you’re like me, someone who has experienced financial instability and trauma in the past, taking the extra time to set yourself up with a solid budgeting routine, a self-funded runway and a debt free lifestyle can help you stay in this new path for the long haul.
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