How to Financially Transition Out of Your 9-5
So you’re ready to move out of your 9-5 and venture into the world of self-employment? Well let me be the first to say, "congratulations!" There are a lot of perks when it comes to being your own boss, and the earning potential is limitless.
However, it’s important not to rush into this transition. Movies always show the main character storming out of the office with their middle finger proudly held in the air. Even though the character doesn’t have any other job opportunities lined up, everything seems to work out great in the end!
Hey, sometimes this happens and it turns out fine. But for the majority of us, this probably isn’t the best way to go about starting our lives as entrepreneurs. In order for you to reach the most success, it’s a good idea to financially plan ahead.
Here is a 5-step process to ensure you’re ready to leave your 9-5.
1. Write Your Budgets
Before launching any business, you need to have your budgets prepared. Not only should you have a budget for your business, but it’s essential to have one for your household, too.
Let's start with your business. Before you book your first client or sell your first widget, you need to have a plan in place. What are your overhead costs? What is your profit potential for each sale? These answers vary for every business. If you are a coach or consultant, your overhead costs are likely fairly low, while overhead costs for an e-commerce business can be higher. Regardless of your business structure, don’t forget to account for things like website maintenance, marketing, and any other necessary expense when writing your budget.
Having a household budget is equally essential to the success of your business. This gives you a clear picture of how your money is spent and how much is actually needed. Illuminating areas in your budget where extra spending occurs will help you as you transition. Set limits for yourself and ensure that your monthly expenses are less than your take home pay. Use my free budgeting starter kit to help you kick this off with ease.
2. Calculate Your Absolute Minimum Income (AMI)
Your budgets are the blue print in your entrepreneurial venture. I mean, you wouldn’t try and build IKEA furniture without the instruction manual, right (unless you’re a gluten for punishment)? In order to be the most successful in your career transition, you have to have your written budgets in place. But then what?
Look at your monthly household budget and figure out your absolute minimum income, or AMI. This is the amount that you and your family need in order to survive each month. Add up the total of your necessary expenses, such as mortgage/rent, utilities, groceries, transportation, and basic clothing. Your AMI shouldn’t include things like restaurants, vacations, or cable TV.
Your AMI tells you exactly how much your business needs to earn in order to meet your basic needs. Is your AMI an ideal situation? Absolutely not, but it’s important to have a clear picture of what you need before you put in your 2 weeks’ notice at work.
3. Earn 50% of Your Current Income
Now that you know where you stand financially, it’s time to hit the ground running (if you aren’t already).
A common question I get is, “How much should I be earning before I transition?” Truthfully, the more the better. The closer you are to matching your current income, the less risk involved with taking the plunge. However, I know that there often isn’t enough time in the day for 2 jobs and your personal life.
When you start consistently making 50% of your current income, it might be a good time to consider your transition. Just make sure that you foresee continued growth. 50% likely isn’t a good number for the long term. If you’ve been stagnant for a while, evaluate what’s going on. Is it because you don’t have the time to take on more business, or that you’ve already tapped the market?
If 50% seems too low, then wait a little longer. Regardless of your timing, this next part is essential.
4. Save an Amount Equal to 6 Months of Your AMI
Since your business is likely your side hustle, any profits earned right now can be considered extra income. I recommend you start stashing that money away.
Save at least 6 months of your minimum living expenses. Why 6 months? Since you are consistently earning 50% of your income, this 6-month savings should last you at least a year. Let’s say your AMI is $3,000 per month. That means you should have $18,000 set aside ($3,000 x 6 months). If your business is earning at least 50% of that ($1,500), then you only need to take $1,500 out of savings each month. Since you're taking out half much, your savings should last twice as long. That means you have enough money on hand to last you a year.
Hopefully you won't need all of your savings. Your business should be growing, meaning you will take less out of savings as you progress. This savings account is only designed to supplement your take home pay. Keep it separate from other business accounts and don’t use it for business expenses, such as marketing or inventory.
If you’ve completed steps 1-4, then it is time for that leap of faith. This is the scariest part of the journey. The point where you break from the norm and fully rely on yourself for your income.
The thing is, you’ve taken a lot of the risk out of the equation though. By preparing the earlier steps, the potential for injury after the jump is decreased drastically. It’s like jumping from a helicopter without a parachute. You can jump at 3,000 feet when the risk is at its highest, or wait until the helicopter gets closer to the ground before hopping out.
Ready to jump? I help entrepreneurs financially launch their side hustle into full time income. Email me at firstname.lastname@example.org to schedule a free discovery session.