I had enough savings to last a year, and my general idea was “Look where you are after a year, if it’s paying you a wage, then keep doing it”
This was very naive for a few reasons. I’m going to tell you why, and then I’m going to show you a better approach.
- It’s ignores that things grow. If I earned nothing for four months, then a third of a wage for four months, then two thirds of a wage for four months, then after a year I’d be earning less than a wage, but I’d also be clearly onto something that might be worth extending a little bit….
- It leaves far too much room for wishful thinking. If I’d earned a little bit, or saved a lot on expenses, then I’d be tempted to keep going for a few more months, especially if I enjoyed it. With that attitude, I can imagine that it takes another year before you realise you are really flogging a dead horse.
- It’s inexact – it doesn’t specify what ‘wage’ amount I’d be satisfied with, or any other detail.
So here’s what I did instead. I stopped thinking of the money as ‘savings for a year’ and instead called it ‘a year’s salary sacrifice’. Suddenly you are in a really different position, and you can start putting things together.
In fact, this is the table I put together.
|Previous or desired salary||$26,695.00|
|Date started business||Tue, September 1, 2015|
|Size of Runway||$8,000.00|
|Where you would be|
|Days since start||21|
|Daily rate (pre tax)||$73.14|
|Earnings left behind||$1,535.88|
|College course delivered||$500.00|
|August takings at shop||$250.00|
|Where you are|
|Days that income covers||10|
|Date paid up to.||09/11/15|
|End of runway||Tue, December 29, 2015|
Once it’s all written out, it’s straightforward (In this example, I used a wage of $26,695.00 because it’s the median average wage in the US). If you know how much savings you have (and you do) and what income you need to keep your living standard up (you do), then you know the date that you run out of money.
But if you make a little bit of money, then that date moves. It might only move by a day or so, but it does move. And maybe you have a lucky break and make a bit more. Suddenly your date is another month away. If you keep growing the end date is going to stop getting closer, and start getting further away. And when it gets further away than when you started, then you’ve paid back all your savings.
When I left academia I was due to finish 31st August 2015. It’s now up to 18th June 2016. If I hustle a little more, I’m hoping it could be looking a bit better by Christmas.
If you’ve enjoyed this post – you can download the runway spreadsheet with all the formulas here: Runway example.