If you plan on quitting your job, don't just follow what people comment here. The actual amount you need should be calculated yourself, based on your plans.
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.
You should also factor in time to get paid. If in your new venture you are going to be invoicing people directly then you should allow at least a couple of months to be paid.
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)
On the order of $4,000, though in my circumstances it was less risky than that number would suggest, since I already had covered-the-day-job cash flow from Bingo Card Creator and strong odds of successfully filling a consulting pipeline by that point. (I'm not counting my retirement account, which was in the low five figures, since I wasn't planning on touching it for any reason short of "I'm dying in the snow.")
I only had about $2000 (half a month's paycheck at the time), but the change in work was prompted by a multi-month consulting gig that was paying in the low five figures over the course of a few months.
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.
I have a similar story. I only saved up about $2000 too, but I also had a 1-month consulting gig that would pay me about 5 months' salary. That was enough to spur me to quit my job and start working on my own. I earned over a year's salary in the past 3 months since I quit and haven't looked back since.
1 year of expenses including rent,healthcare, food ,etc.
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.
6 months is a decent starting point for one-size-fits-all advice, which is why it is the standard context-free recommendation, but I honestly think there are circumstances where you can skimp on it.
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.
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 ;)
$10k liquid + $15k in withheld taxes the government owes me.
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 have no idea why anybody buys a single family house;"
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.
this is the only realistic post i saw on here. the people who say they saved 2k before starting their venture are probably 18-22 years old and crashing at their parents' pad.
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.
I made around $60K/month for a good 2 years from a side project, while still keeping my day job.
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.
I quit my job two months ago with close to $10k saved up. It's too early to claim success, though. I think location is really relevant. In Pittsburgh, rent is quite cheap, but I'm sure the situation is different elsewhere in the country.
Planning on quitting with 6-9 months of burn (assuming I don't make another dollar). But I'm also planning on putting a startup before freelance/consulting so it might be a while before I start breaking even.
I wish I knew more about these stories. How OLD were you? That's key to me. It's one thing to quit your job when you are 23; another entirely if you are 51. I'm assuming the average age of the commenters below is 28.
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.
Number is pretty irrelevant if you're not relating it to expenses. Living with 4 roommates or something for $200 a month is going to take a lot less cushion than if you have a family of 3 and a mortgage.
About $20k, in a mutual fund. Didn't plan to spend it all but I did, quickly. I was working at a grocery store though, so little "risk". :)
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.
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)
I had either 3 or 6 months of salary saved up - whatever it is that experts always say. And I'll tell you this, I was super freaked out about money the entire time. I felt like I was just about to go broke almost every step of the way until I landed my first good client. (That took 4-5 months, if I recall correctly.) And I'm a pretty mellow person able to deal with some amount of risk.
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.)
First time: about two months salary. I'd just been laid off for the second time in two years, and rather than find another job in the same industry, I decided to try doing my own thing for a while. It was a great learning experience and I eventually came out ahead, but I basically lived month to month for several years.
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.
About $26k, though a good chunk of it was commissions that were still incoming (with no guarantee of receipt).
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.
I had almost a year worth of normal income stashed away. Plus my wife's income was also coming in. To be honest that was a really conservative move and not really required. I made a pretty comfortable amount plus had some pretty large side web jobs I helped build up my savings. It was a lot of after hours working though.
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.
[+] [-] dutchbrit|12 years ago|reply
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.
[+] [-] jsvaughan|12 years ago|reply
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)
[+] [-] singold|12 years ago|reply
I did this calculation for myself, and concluded that the only way I have is being fully profitable before quitting my job
[+] [-] guerrilla|12 years ago|reply
[+] [-] basicallydan|12 years ago|reply
[+] [-] patio11|12 years ago|reply
[+] [-] unknown|12 years ago|reply
[deleted]
[+] [-] unknown|12 years ago|reply
[deleted]
[+] [-] TaffeyLewis|12 years ago|reply
[+] [-] robertnealan|12 years ago|reply
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.
[+] [-] bwangsta|12 years ago|reply
[+] [-] doppenhe|12 years ago|reply
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.
[+] [-] patio11|12 years ago|reply
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.
[+] [-] Spooky23|12 years ago|reply
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.
[+] [-] callmeed|12 years ago|reply
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 ;)
[+] [-] onion2k|12 years ago|reply
No regrets though. The last 4 years have been a lot of fun. :)
[+] [-] AznHisoka|12 years ago|reply
[+] [-] alanbyrne|12 years ago|reply
1 year later and still going strong!
[+] [-] PaulHoule|12 years ago|reply
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.
[+] [-] codegeek|12 years ago|reply
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.
[+] [-] jahbreeze|12 years ago|reply
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.
[+] [-] jsonmez|12 years ago|reply
[+] [-] AznHisoka|12 years ago|reply
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.
[+] [-] newppc|12 years ago|reply
[+] [-] gw|12 years ago|reply
[+] [-] grimtrigger|12 years ago|reply
[+] [-] cprncus|12 years ago|reply
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.
[+] [-] bluedino|12 years ago|reply
[+] [-] sejje|12 years ago|reply
[+] [-] eliasdelatorre|12 years ago|reply
[+] [-] basicallydan|12 years ago|reply
[+] [-] qeorge|12 years ago|reply
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.
[+] [-] wyattsthrowaway|12 years ago|reply
$500/mo recurring
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)
[+] [-] vitd|12 years ago|reply
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.)
[+] [-] esw|12 years ago|reply
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.
[+] [-] lumens|12 years ago|reply
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?
[+] [-] benmorris|12 years ago|reply
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.