1) How much money do you need to get round per month.
2) Add a chunk ontop of that for unforseen expenses, broken fridge for example...
3) How long do you estimate you'll be working on your project?
4) Add a large percentage to that estimate for unexpected issues
5) Will you need to make investments? Hardware? Designers? Calculate these figures.
6) Add a month (or 2) to the above, if your project fails to start making revenue, you'll need to find yourself a job - well, depending on how easy it is for you to find a good job...
It's an amount you need to calculate. Don't underestimate.
Then you're ready to roll.
i.e. you say 30 day payment terms on your invoice, but nobody will pay until that 30 days has elapsed, some people will pay you in the 4 weeks after that, and sometimes even with aggressively chasing you will have invoices which are 2 months overdue (i.e. no money for 3 months after they received the invoice)
I did this calculation for myself, and concluded that the only way I have is being fully profitable before quitting my job
My advice is to start looking for work before you leave your industry job - think if it as though you're doing lean testing on your product, except your product is yourself. If you can't find clients while at your day job, then iterate on yourself (website, services offered, your client pitch, how you're looking for clients, etc) and try again.
When doing financial planning you should always try to save up to 6 months of all expenses. This is hard to achieve but the recommended number even if you are staying at your industry job. You never know what can happen.
For example, in the totality of your personal situation, you might have:
+ multiple independent sources of income
+ insurance against common forms of risk (e.g. very good health or occupational coverage)
+ strong non-market safety nets, either via your government or social network
+ better than average marketability of your skills
+ a lifestyle which was amenable to belt-tightening in the event of an emergency
+ access to credit which would survive events likely to cause a hit to your income
I appreciate that there is a wide range of the risk tolerance spectrum represented on HN, and I'm probably towards the "I'd prefer more consistent, smaller returns" side of it, but there are many people for whom six months of savings is underbuying risk given their positioning and preferences.
My family makes a good income, own a modest home, drive 10 year old cars, have $0 debt ex-mortgage and don't do exotic trips. We put 20% away for retirement.
Our baseline cost to live including mortgage, property tax, food & minimal extras is probably around $45k. Our area has a tight rental market, so owning the house is a net money saver.
Other than cannibalizing retirement, building up that much is tough.
No car, no family to support, no travel, no expensive purchases (I remember deliberating for weeks about buying an iPod Nano). Doubt I could have done it with a family to support and multiple cars.
I did have immediately family as a safety net but I covered my own expenses for whatever I needed after moving out, with the exception of a few meals here and there.
Not having any dependents helps...a lot.
I don't own but rent - economically in the long run buying would be more advantageous but being able to move in a heartbeat or quit my job to start my own business took priority over that. I am religious about saving cash. Every month before my paycheck (used) to drop in my account I would put a decent percentage into savings - this was after 401k contributions (which I did about ~10%). If i received a bonus at work 90% would go directly to savings either in the form of my personal investment account or cash reserves (with 10% always going to 401k). The remaining 10% was for the family slush fund.
From a financial planning perspective 10% might be low for 401k but I believe I can make my money work harder outside of it. My household cost is similar to yours (~45k), I add 10k to keep sanity (vacations with wife, anniversary presents, etc).
Disclaimer: This is working for a established tech firm paying towards the high end of industry average and working there for 5 years. If you are in a startup your salary is lower and lopsided towards equity so achieving this cushion I imagine is a lot harder.
Currently I put 1/6 of my pre-tax income away for retirement, then put 1/5 of the remaining into savings, and another 1/5 into my emergency/charity account. I donate 1/4 of that account to charity at the end of the year, and I also dipped into it when my apartment caught fire.
I'm probably not going to be able to keep all of this up when I have kids, but I'll be doing it until then.
If you make that decision, it also makes it easier because it reduces the amount of money you would need for six months expenses. If you're low on cash, you're less likely to put money into retirement savings anyway (since if it takes too long to get more revenue, you'd have to pay fees to make use of that same retirement money.)
I don't know if it matters but this was in 2000 (and not in SV/SF). I was doing IT/help desk for a UPS call center with a few servers and 75 workstations (on a token ring network!).
We had been doing educational software in our spare time. We landed a couple decent contracts and I decided to quit and go for it (I was also a senior at Cal Poly and quit). At the time, my rent was $400/month and I wasn't married. We found an office for $250/month.
Of course 18 months later things got real tight. After the .com crash, a lot of california colleges got their budgets cut. But we survived long enough to sell the company at the same time a new one started and took off.
I'm sure there's lots of sound advice here and my story shouldn't be a model.
I haven't had a real job since and I'm still a senior ;)
No regrets though. The last 4 years have been a lot of fun. :)
1 year later and still going strong!
At least 5-8x that in an HSA, 401k, SEP, IRAs, Roth IRAs and tax-advantaged government bonds paying 7.5% that I bought a few months after I cashed out of the Janus fund in Dec 1999. (My broker fired me for that)
I'm going to hold on to those bonds as long as I can, and I'd much rather borrow against the equity of the "home" I own at a lower rate. (I bought the home in cash, so this is my "first" mortgage -- I opened the account when I wanted some capital to take a chance at buying an adjoining property at a tax auction.)
One of the first things I did when I quit was write a check from the heloc to the HSA so I wouldn't have to think about making contributions for it.
It's a little more complex than that because I have two houses on one large lot and my wife's riding academy and the rental income creates a financial situation that's so sweet it's almost a scam. I think last year I got $16k of rent, experienced a positive cashflow of around $14k from it, but the IRS says we made $4.5k of income because of depreciation on our property.
(I have no idea why anybody buys a single family house; as much as muggles make a big deal of the mortgage interest deduction, owning a duplex means you can write off half the principal plus you get a cash flow to help w/ the mortgage and property taxes. Maybe you even get a cool neighbor.)
One key to making this work is that I can get a high deductible health insurance plan through COBRA for $500 a month and that will tide me through until Obamacare comes unless the Republicans defund it. That's important because there really isn't any such thing as individual health insurance in NY. (I'd better write that letter to my Republican congressman before I forget.)
Anyhow, it isn't all roses. I pay $4k a year in taxes for a "persistently dangerous" school that my son goes to where probably 1/2 of the parents w/ college educations don't send their kids to because they homeschool. They haven't had a principal last more than two years so long as I know.
The internet sucks out here too. Github works OK, but it took 30 seconds to create a trouble ticket with the off-brand project management software at my last job, which was one of the reasons I quit. Netflix and Amazon instant video work, but I can't really watch Youtube. I used to use Flickr a lot, but with the latest update it is so slow I can't even use my own photographs when I make a presentation because it takes 1 minute+ to load.
I can give you a few personal reasons which hopefully resonates with a few others. I prefer having a "detached" home. I dont want the hassle of sharing anything with anyone. That does not mean I dont want neighbors. But I am not interested in hearing when my neighbor flushes their toilet. I like having a backyard with some vegetation. I like having a driveway that I don't have the share (lot of new townhomes do that) etc etc.
Biggest reason: Kids. Yes you can live with them in condos/townhomes etc. but the autonomy/freedom of a single family home cannot be undermined.
It is not always about money and ROI. Life is a lot more than that and this coming from someone who values money a lot.
I grew up in Manchester NH where housing prices are high in the suburbs where I grew up (that's how I traded a 1200 sq ft house for a 75 acre farm with two houses and a barn the size of an aircraft hangar.)
In a really nice neighborhood in downtown (w/ good access to the freeway as well as a local grocery store 2 blocks away, as well as a dunkin donuts and a great ice cream stand not to mention a municipal pool and a beautiful park with a big pond and hiking trails) my uncle bought a huge 3 story house that was "luxury housing" in 1910, lived on the first floor, put up his mother and sister on the second floor, rented out the third floor to one family since at least 1976, finished 1/3 of the basement and built an addition on the first floor, raised 2 kids.
His property values are "depressed" compared to an array of 2 story colonials that were built in 1998 next to the intersection of Rt 93 and 101 (we measured 80 db noise levels outside.) These houses are made of chipboard (we hit "peak wood" 15 years ago and nobody noticed) and they suffered 90% mortality for the yews planted on the foundations because the idiot contractors didn't know that you're supposed to take the burlap bag off yew plants when you plant them.
But I guess they are expensive because of the liquidity premium that you can sell go get an equally bad house in Texas or Las Vegas or anywhere.
if you're a grown up, i don't see anyway you can start a venture without a year of savings built up or some sort of income (investments, part-time work, etc). let's say you give your venture 6 months and you fail. you'll need a few months to get yourself a paying job again before you're evicted/foreclosed.
Remember now it's not just about "not getting evicted", it is also useful to have working capital.
I have a project I'm working on that will probably cost $600-$800 of computation in a Hadoop cluster in Amzazon AWS assuming I don't screw it up and have to do it twice.
In my situation I can "just do it".
To make an analogy with Poker, you do not want to be short stacked.
I know many "entrepreneurs" have an idea which they could move forward with personal investments in the $50-$5000 range. Instead of making a cool demo or any kind of prototype, they go talking to angel investors and they wonder why they get nowhere.
Somehow though, they manage to find $150 to give to Time Warner and $150 to give to Verizon every month.
For a while, for instance, I was talking w/ people in NJ, CT (imagine a donut centered around NYC) about applications of text analysis in financial services. Lots of talking to investors, but no demo.
I spent about 40 hours and about $12 (domain name) on a demo over the course of six months, which failed. It's material for a blog post. I can say I didn't know anything at all about the problem when I started and now I know something.
Also you really gotta pay attention to taxes when you're self employed. I lost about a year because I owed the IRS and NY about $15k of estimated tax I didn't pay, so I took a job I shouldn't have taken. I can be philosophical about it because I met one of my competitors at a conference and he was bouncing off the walls because he'd spent a year fighting with the technology transfer (prevention) office at his uni.
Edit: I suck at english apparently.
Nowadays I make close to $8k/month passive income, and I regret not quitting back then. I could've easily made double the amount if I had focused strictly on that.
There should be a formula that includes terms for age, likely earning potential on re-entry to job market, savings, debt, assets (like a paid-off house), % completion of the start-up project you're leaving for, monthly influx from startup project when you quit, etc., etc. The formula would pop out a single number, the Gutsy Factor.
As others have said - you need to learn to live cheaply. Savings dwindles amazingly fast when you have no income.
Personally, I dropped my cell phone & cable TV, and got rid of my car. It took about 3 years to get back to "normal" - would never have made it without slashing expenses.
negotiating a $15k consulting project
several other potential projects in early talks
Remember that runway = cash/burn_rate. Lowering burn rate was a key enabler: I was able to find a rent-free living situation for a few months and that put me over the edge to quit. I also have a nice safety valve in that at the end of the runway, I don't crash and burn, I walk right back into an industry job.
Because my burn rate is much lower than my former 6.5k/mo industry pay rate, I expect this to go much further than the 3 months pay I have in savings. That said, I'm being conservative and would only commit myself to 3mo terms at the longest for office/rent.
I don't claim to know anything about the sufficiency here, it was just my best guess. Comments welcome :-)
* There are no guarantees, but I received 3 offers @80k+ in 1mo of searching, so I like my odds. On a related note, always prefer data like this to a gut feel of your employability.
(throwaway -- don't need prospective clients seeing my financials)
If I had to do it again, I'd make sure I had at least one year's salary. Several people have asked, "How is that possible to do?" I wouldn't have been able to do it at the time. Well, all I can say is that it gets much easier as you get older and get better jobs with stock options that are worth something, and if you've been saving for a decade or more. If you're just starting out, it's a lot harder if you aren't incredibly lucky. (Although you also have fewer repercussions if you mess it up.)
Second time: about a year's salary in savings, and I had enough revenue to live on by the time I quit my day job. I was probably overly cautious, but my wife was pregnant and I didn't want to blow it.
That said, I think there is a similar concept to the Minimum Viable Product that I'll call "Minimum Acceptable Savings". If you're going out on your own, your job is to Figure it Out. You need enough to be able to start figuring it out, but any more than that and you're stalling the move and ultimately falling behind.
Don't be scared to sell your couch, y'know?
Pretty ironic to be talking about this today, because this is a year to the day I left my day job. I still can say it was the best thing I ever did.
In addition to all of that, I had zero debt.
I could survive on $2,000 per month.
i should make some of those before i quit my industry job... although i was hoping i would get up and running on the side, and not needing any other peoples money...
i might quit after something takes off enough to need full time attention. :)