I’ve been searching online a lot lately for a clear, simple formula for how much money I will need to leave my day job and pursue my “side-hustle” full time.
Some of the pieces of advice I’ve seen are
- When all of your expenses are covered
- When your side hustle is making exactly half of what you make from your day job
- When it replaces your full income + 6 month emergency fund
- Never (just keep both!)
My goal with publishing, and now online teaching (at Faithspring), is to eventually do these things full- time. Doing these full-time will allow me to accomplish so much more, and reach countless more people with the message that they are here for a reason and the path to finding that reason isn’t as complicated as we usually make it out to be.
After lots of thought, excel sheets, reading, and talking with fellow entrepreneurs, here are the 3 financial goals you MUST hit before taking the leap. Now, you may want to adjust these according to your situation. But I think if you keep these 3 milestones in mind when you are making your action plan, the leap will seem a lot more doable and you’ll have more resources and less stress once you finally do take the leap.
Milestone 1: Get the side-hustle to cover your expenses + 20%
For all the “risks” I may take, I am actually a pretty conservative guy at heart. I believe having your business cover your expenses is a great first step, but it does not give you much leeway for when things go off track (like having your rice cooker, vacuum, and juicer all break in the same week!). This is where the extra 20% comes in. That will give you some peace of mind as you take the leap.
Also, don’t forget to count your business expenses as a part of the expenses you will need to cover. We all think about housing, food, healthcare – but if you are going to keep sustaining and growing your business, you will also need to cover things like software, designers and advertising.
Here’s a sample budget that’s somewhat close to mine (I made the numbers nice and even):
- Housing – 700
- Transportation (car, insurance, gas) – 300
- Food / Utilities / Internet – 500
- Healthcare (if not covered by spouse) – 400
- Misc + Giving – 100
- Software – 300
- Advertising – 100
- Designers – 100
- Taxes – Varies
Total – 500+
Grand Total: 2500 / month + taxes (I just stock away 30% of any revenue to be safe)
So that means I need to be bringing in:
2500 (to cover expenses) + (2500 x 20%)(For buffer) + (2500 x 30%)(To make sure taxes will be covered)
New Grand Total: 3750 / month
Now I have a nice clear goal to aim for. In this example, if I can bring in at least $3,750 a month ($125 per day) I can cover everything I need, with room to spare.
Doing that math should make the leap seem A LOT more doable for you. I know it did for me. When I first started thinking about what I would need I was honestly overwhelmed. But as I kept running through the different scenarios, I always came back to a similar number – somewhere in the area of the formula I showed you above. Take a minute and plug in your own numbers using the basic formula below:
Expenses + (Expenses x 20% Buffer) + (Expenses + 30% Tax Margin) = Target Leap Income
If you don’t have an exact idea on what you’re spending each month, I highly recommend getting an app like Mint to help track your spending. With Mint, I never have to guess where my money is going because I can track every dollar in every account (for both business and personal).
Milestone 2: Get rid of all your consumer debt.
How motivated are you…really…to leave your day job?
Motivated enough to skip out on fancy meals? Forgo the latest movies/games/clothing/etc.?
If the answers yes, then one way you can prove that motivation is to really focus on killing your debt. Two years ago I finished my master’s degree with just shy of $50,000 in student debt and $15,000 in car debt. As of today, my total remaining debt sits right around $20,000. My goal is to have that completely gone before I make the leap.
Here’s a few reasons why killing your debt before the leap is a must:
- Your expenses will be lower (No debt payments brings my expenses down by over $500 a month)
- You’ll have peace of mind (No one to owe is a great feeling, and a great psychological advantage as you build your hustle)
- Your income can move you forward, instead of paying for your past (Debt limits how fast you can move towards your next goals)
- Consumer debt does not include housing (So paying off your mortgage before a leap is not necessary)
If you’re going to take your hustle seriously, then you can start by taking your current financial state seriously. Get rid of your debt (your side hustle income + your full time income can help you achieve this goal pretty quickly) and then get going towards what’s next.
Milestone 3: Build a $1,000 emergency fund.
Here are a couple questions I’ve gotten asked at this step:
- Why is this step third?
- Why is it such a small emergency fund?
- What if I want more/less in my fund?
First, this step is third because the others require much more work, focus, and long-term commitment. This one is an easy one to check off, which is why I saved it for last. This should be the last “alright, I’ve got this” before you take the leap. It should give you another boost of confidence before you go all in with your dream. Plus, building a large emergency fund while your debt is growing from interest (minimum payments are going to cut it folks) is just counterproductive.
Second, it’s small because I’ve seen people p a r a l y z e d by trying to build huge emergency funds. They would try to put away a full 6-12 months of expenses and wind up working 2-3 more years in their full-time gig. That’s time that could be spent taking your side hustle from 2k to 20k a month. We can (and often do) find any reason we can for delaying difficult and scary decisions. Leaving a “safe” job should make you feel nervous – it’s risky for a reason! But don’t let your preparation for that risk paralyze you from taking action.
Third, I chose $1,000 because that is an easy enough number to hit for most people within 1-3 months. Especially after their debt is paid, and they have a money-generating side hustle. A thousand dollars can cover most emergency car fixes, a hospital bill, or a broken home appliance. It won’t cover the biggest of problems, but it’s enough to keep you from falling back into debt should some unforeseen problems arise.
So that’s it:
- Follow the formula: Expenses + (Expenses x 20% Buffer) + (Expenses + 30% Tax Margin) = Target Leap Income
- Get rid of all your consumer debt.
- Build a $1,000 emergency fund.
Let me know what you think of the formula and milestones below!