Good question. Having just grappled with this, let me share some pointers.
Being an entrepreneur, especially starting out, is challenging. Much has been written about startups. This blog entry is about how to afford it.
Chances are you are a bright, self-moivated individual, working for some large corporation or a mid-sized company, earning a reliable paycheck, but frustrated. You are frustrated because you don’t have enough time to focus on your own business ideas and you just can’t build momentum with your full-time job taking so much time. Furthermore, you are noticing that management in your full-time job are not as competent as you once thought and this too is frustrating you, making you start to dislike your job.
If you’re like me, you even went down to part-time employment to try and “make it work” to give yourself more time for your business but still have a steady paycheck to support your family and/or lifestyle. This didn’t work for me either. It made me loathe the days I had to go to work (because when I’m “working” on my own business ideas, its not work, its fun!). Finally, I decided to take the plunge into the unknown and quit my full time job. [switch to clip from the 3rd Indiana Jones movie, where, searching for the Holy Grail, he steps off the cliff, in faith that the path will be shown].
Other than frustration and motivation to work on my own ideas, lots of financial decisions had to come into play here. Can I afford to do this? Will my own business actually generate enough money for me to live on? How long can I survive without a paycheck?
This decision has to be made with confidence, otherwise you’ll second guess yourself and probably fail, so you have to gather facts and build up your own psychology to commit to it. I got lots of inspiration from books like “Who Moved My Cheese”, “The Secret”, and “The Millionarie Next Door”. But my finances are my own, I was left to my own on this matter.
Fortunately, I had my family living well below our means already so planning for this was not hard. In fact, once I made my decision, figuring out if I could afford it took less than 1 hour, thanks to CalendarBudget. Here are the changes I had to make in my own family budget:
- Discontinue Retirement savings (RRSPs in Canada, 401K in US)
- Reduce monthly miscellaneous fund to $50
- No more eating out, except for very special occasions
- Gifts now get to be homemade or taken from my regifting pile
- Cancel superfluous subscriptions (audible.com, ZIP Video direct). I already don’t have TV, otherwise I’d have either removed it or gone down to basic cable.
- In my case, tithing also diappears without a paycheck coming in.
- Re-amortize my mortage. I had previously increased my biweekly payments to more aggresively paydown my mortgage. By returning to my original amortization, I get back about $350/month.
- Since I’ll be working from home, I’ll save on gas for my minivan. (from about $60/week to closer to $20/week)
- I may even be able to have my car insurance rates reduced because I’ll no longer be travelling to work
- I called my dentist and arranged for appointments for my whole family (far ahead of schedule) to have them completed before my last day at my full-time job and take advantage of the benefits. Same for other benefits.
- I need computer equipment, so I buy those while still employed to get employee discounts (since I work for a big computer company).
- Do I live on retirement savings or use a line of credit? After discussions, analysis and advice from my finanical advisor, I feel its better in my situation to leave my retirement savings alone and use my line of credit. My retirement savings are earning a higher interest rate than my LOC is. Besides, if I use my retirement savings, it gets taxed at tax time, so I only get about 70% of it (30% goes to government). Thats no good – so LOC is an easy choice.
Also, I arranged with my bank about using our LOC to ensure I have the proper capacity in my line of credit while I still have paychecks to prove I could pay it down. Keep in mind, anything done with your bank, they are probably going to want to see a few recent paychecks, so arrange these things before your last day!
CalendarBudget let me make all these changes and see what effect they will have on my future finances all within about an hour.
Things still to be done:
- apply for government grants
- better understand how much money will be needed for the startup – particularly marketing.
In the end, there is always risk with something like this, but it can be mitigated with proper planning. Also, I’ve timeboxed this whole plan of mine. After X number of months if the startup is not showing promise, then I head back to the job market to find a paycheck again. This helps the family feel more comfortable with the idea since they know I can always get another job if needed rather than put everyone at risk or not eating 
So, I know I can afford it, at least for about 1 year. Then we’ll need to re-evaluate the complete situation.
Let the games begin!
What experiences have you had taking on big financial unknowns in your life?
November 6th, 2007 at 9:50 am
My employer didn’t like this posting too much
On my last day of work, I was pulled into an office and confronted on this. While I worded it very carefully not to disclose who I worked for, I did send around this blogs URL in my farewell note and many co-workers read the part about “management in your full-time job are not as competent as you once thought” and reported me.
Unfortunately, sometimes the truth hurts guys, but I think I may have lessened my chances of returning if I choose to try. Although was probably a mistake, I think the point it understood by anyone in the position described in this posting.
Good luck!
November 19th, 2009 at 7:09 pm
We all have big changes in our lives that are more or less a second chance.