Can you quit your day job? If you want to become self-employed full-time, here's how to plan for it - Finance - Tutorial

Home Office Computing, March, 1993 by Linda Stern

If You Want to Become Self-Employed Full-Time, Here's How to Plan for It

When I quit my last job almost seven years ago, I started saving about $220 a week the day I walked out the door. That was $160 for child care, $10 for subway fares, $25 for lunches out, $9 for panty hose, and about $16 for the magazines, newspapers, clothes, and other impulse purchases I made walking past glamorous downtown stores on my way to and. from the office. That $220 figure does not count fast-food dinners, extra treats I bought myself because I was stressed out, and wear and tear on my high heels. Nor does it count income taxes, which in my family went down considerably in that first year, when I was building a business and not earning much. As a matter of fact, I used my first year's tax refund to buy my first computer.

Which is all a long-winded way of saying that maybe you can afford to quit your day job (and devote yourself to your business) sooner than you think. When you leave a job, some costs go up, but others go down, and money becomes elastic.

In order to figure out how elastic, you have to crunch some numbers. Unless you're an advocate of the close-your-eyes-and-jump-and-then-figure-out-how-you'll-afford-it school of business development, some financial planning will cushion your exit. A couple of good (and honest) spreadsheet sessions can mean the difference between making it or losing it when you are in transition from a job to selfemployment, according to Bethesda, Maryland, financial planner David Drucker, who credits his own planning sessions with saving his sanity and his stability.

"I've had lean times, and I've been worried sometimes," concedes the 44-year-old Drucker, who with a partner rounded Malgoire Drucker in 1984. "But I've never had to borrow any money to make ends meet. I attribute that to good planning in the beginning."

Before you march into the boss's office singing a Johnny Paycheck song, pull up the old spreadsheet. And do these calculations to see when you can afford to quit your job.

FIRST, PREPARE A P&L STATEMENT

Treat your life like a business and prepare a profit-and-loss statement, advises Drucker. If you've been tracking your expenses on disk, with a checkbook program, or on paper, you're already ahead of the game.

So set up a spreadsheet, and at the top of the first column put any business income you've made in the last 12 months. Under it, put your business expenses, and divide them into two categories, essential and discretionary. Your phone bill is probably essential, while trade publications (which you could catch up on at the library) might be discretionary, for example.

Set up the spreadsheet to subtract the total expenses from your income and use the net figure as the top line for your personal-income statement, which will start further down the same column. List your income for the last year, including interest earned, spouse's income, tax refunds, gifts from relatives, and the like. Tally your personal income and then start listing your personal expenses, including taxes and miscellaneous items.

Finally, subtract personal expenses from personal income. The number at the bottom should be either zero or a positive number, which is the amount you have added to your savings (or used to cut debt) in the past year.

NOW, LOOK AHEAD

Prepare column two, says Drucker, by analyzing how column one would change if you quit your job. He suggests preparing a "lean, mean" scenario by zeroing out all of your discretionary spending on items like vacations, dinners out, and the like. Keep clothing and food budgets to bare (but realistic) minimums. You can cut commuting costs and other workrelated expenses. Don't forget to cut taxes--the less you make the less you pay, so try to get a realistic appraisal of how much you'll save in taxes when you lose your salary. (Hint: If you have taxpreparation software, that's a snap.)

But you'll have to add back in some expenses: health, disability, and life insurance, if you aren't going to be getting them through a spouse, and the 15.3 percent Social Security tax you'll have to pay on your business income. Don't forget the higher costs that your home-based business will consume as you build it, as well as higher utilities if you work out of a home that used to be empty all day.

Child care can be tricky. You may save on full-time day care if you choose to work around your children's nap and food schedules. But anyone who has ever been a parent knows that "the business that can be run while the baby sleeps" is a myth. Realistically, if you have babies or toddlers, keep some child-care money in your expense list.

The bottom line in column two will most likely be a negative, but how big a negative is it? That's the amount you'll need to make up elsewhere. Tongue only slightly in cheek, Drucker suggests that you double that figure for a truly realistic appraisal of what you may need to come up with in the 12 months afier you leave your job.

Drucker suggests you do long-term planning and project your profit-and-loss statement about three or four years down the line. But you have to do a fair amount of guesswork. Projecting your business income for three years should be more than just wishful thinking; carefully consider the market for your goods or services, how much you charge, and how much work you can reasonably expect to get and perform.