So you’re teetering on the idea of going full time on a business an idea. You don’t really have much of a choice but you know one thing: you’ll have to quit your job and start living off of those hard earned savings.
So you may begin asking yourself: “How long can I survive on my savings?” This is the very question that’s occupying my mind at the moment. I have a business venture that I’d like to pursue fully, but my current job is in the way. Often people will recommend starting a business on the side and making sure that you’re able to generate a profit before quitting. That’s definitely sound advice and the preferred approach, but sometimes that’s not always possible depending on the idea behind the business venture. Personally, what I’ve found is that I am able to work on my business on the side, but it’s going rather slowly. There are just not enough hours in a day!
To explain my dilemma a little further: I would like to launch an online business. However, I don’t have much web experience, so progress is a little slow. I need to learn in between my work, and work in between my learning. The cycle continues! And if my business venture fails then as my plan B I would like to get a job as a web developer. I’m hoping that my web experience gained from the business venture and the business product itself would entice prospective employers. However, if the business takes off, then I’ll be a happy man and I won’t have much to worry about (except for all the headaches that go along with owning a business!).
So in the end, all I’d like to know is if I quit my safe and cushy job today, how much time do I have to to make my business profitable before my savings run out? And if I find that the time I can afford to build a business is too short, then I know I need to continue saving.
I found the following lifehack article promoting the idea of quitting your job to pursue your dreams also quite enlightening: 7 Reasons Why You Should Quit Your Job and Follow Your Dreams. The article recommends 3-6 months of emergency savings when you quit, but is it enough? That’s something that may be different from person to person, but it’s a nice average “shoe” size that fits most people.
I certainly don’t recommend anyone simply drop their current career and pursue whatever else in life, but it’s definitely interesting to think about. Afterall, you never know when you may need to do it! How prepared would you be if you had to leave everything behind today?
There are a few considerations that already come to mind about quitting. Most importantly being that I avoid withdrawing money from accounts that incur withdrawal penalties, such as an IRA or RRSP. There are some penalty-free withdrawal strategies, but usually they come with some stringent strings attached, so for the time being I will assume that the money in those accounts is untouchable.
Also, I need to have a very good sense of what my average monthly expenses are, so that I can make a reliable prediction of how much I’ll need. The best way to do this is to track your monthly expenses over the course of 6 to 12 months. To clamp down on your expenditures, you may consider making yourself a budget.
Finally, if I can get a decent return on the remainder of my savings as I deplete them, then I may be able to extend my entrepreneurial survival period.
Crunching the Numbers
For my situation, let’s say I have $45,000 in liquid assets. Although I’m not confident in being able to consistently generate an 8% return from my investments, I’m going to make the assumption that I can (after all, it’s difficult to predict anything in the future, but as long as you make some reasonable assumptions, you should be fine). If the return ends up higher or lower than this amount, it simply means that my free time is either cut short (if my return is less) or extended (if my return is more). I may want to play with a couple of scenarios with various interest rates to find out what my worst-case and best-case situations would be.
Based on my budgeting, I know that I spend about $2,000 a month for my mortgage, food, car, and other essentials. Using the calculator below I discover that I may be able to squeeze just over 2 years out from my savings. This is more than enough time to get a business going and hopefully have it generate enough cash to lessen my savings burn down!
Given these gracious and opportunistic 2 years, I decide that perhaps I’ll have enough time pump out a business idea quarterly. That amounts to 8 business ventures over 2 years. If each business venture has a 15% chance of success, what is my overall probability of success (i.e. what are my chances that at least one business venture succeeds)? Using the theory behind Bernoulli’s trials, the answer to my question is 73%, which is not too bad. How would you feel about quitting your job to pursue various business ideas?
How long could you survive on savings alone?
|Monthly Expenditures (savings withdrawals):||$|
|Annual Return on Available Savings:||%|