The "Quit Your Day Job" Fund
At Breakaway, our advisors work for themselves, not by themselves. This means that while we take care of all the back office details so they can focus on their clients, our advisors are entrepreneurs who get to enjoy the thrill (and sometimes experience the disappointment) of finding their own client base. While the first few months of entrepreneurship can be exciting, they can also be a little daunting. Many of our potential advisors ask what they should do to prepare themselves financially and how much money they should save to feel confident on their journey.
The short answer is 3-6 months worth of monthly expenses, plus an emergency fund.
The long answer and how I arrived at those numbers (and how you can, too!) is a little more complicated.
First and foremost, sit down and make a very, very realistic list of exactly what you are spending each month right now - and yes, even accountants and bookkeepers don’t always do this simple budget exercise at home! This includes all the big ticket recurring items (i.e. rent, utilities, insurance, car payments, 401k, student loans, credit card payments), as well as the smaller ones, (i.e. any monthly subscriptions, like Netflix or your gym membership). Then review your non-fixed spending for the past couple months. Be COMPLETELY HONEST with yourself about how much you spend on groceries, eating out, coffee, shopping, gifts, etc. There are several great apps for this. I like Mint and a ton of people swear by You Need a Budget, but for me, a plain old spreadsheet has always worked best. This is the starting point for your budget. Don't forget to make a note of those expenses that only come once or twice a year (I always forget my car insurance and holiday shopping!) It is also a good time to evaluate what might be missing from your monthly expenses - do you contribute to an emergency fund? Do you have life insurance?
Second, make your ideal budget. If you had your dream (but realistic) salary, how much would you like to spend on your current expense items and any additional expenses that you can't currently squeeze in? For example, in my "ideal" budget, I would max out my IRA and also contribute more to an emergency fund. I would also make room for a little more "fun money" to fuel my book buying habit and travel bug.
Third, make your bare bones budget. This is the absolute minimum amount you have to spend to maintain a comfortable lifestyle. This budget should not be extremely austere (by all means keep your Netflix subscription if it brings you joy!) but cuts out the majority of extras. If you are planning on leaving your job, make sure you budget properly for health insurance in this version!
Fourth, take your bare bones budget and multiply it by something between 3 and 6 (whatever makes YOU feel comfortable) - this is your emergency fund. Realistically, if you're looking to quit your job, you may plan to dip into an already existing emergency fund and that's ok! However, try not to let this fall below at least one month of expenses, if only for your own peace of mind.
Fifth, get the median of your bare bones and ideal budget. Save up 3 months of this, plus 1-2 months of your bare bones fund for emergencies (or more, if you need that to feel comfortable) and there you go! For me, this usually comes to about $10,000 plus a small emergency fund of about $1,000. (Because I rent my home, have no kids, and carry excellent insurance polices, I usually feel comfortable having less money in this stash, but that is totally my personal preference and risk.) However, remember, the biggest mistake people make when leaving their jobs is not having proper health or car insurance. Even a minor illness or fender bender can bankrupt you! Insurance is NOT where you should cut corners.
It may seem scary, but a little preparation will make your first few months on your own much less stressful and you’ll be feeling that Breakaway joy in no time. Life is too short to be miserable and there is always, always work to be done.
Shea Keats
Advisor