mo’ money, mo’ problems

The dreadful thing about having a steady job and a decent monthly salary is that you become conditioned to believe that you need it.  And if you don’t particularly enjoy your job, then that salary becomes the justification for sticking it out and the means of paying for all those treats you buy yourself to make up for it.  Sound familiar??

Allegedly, there’s a button on Word Press that allows you to insert a poll.  I am nowhere near that level of technical wizardry, but if I were to do a poll of top reasons for not starting something new, I’d guess that lack of cash/fear of financial meltdown would come up pretty high.  Understandable, perhaps, but (whispers), I think you might be using this as an excuse…

what’s it worth?

I’m not going to pretend that it’s easy to walk away from a salary.  It’s not.  I thought long and hard about when to do it.  I gave 3 months’ extra notice on my job, just to get that bit more cash in the bank and to give myself time to adjust to thinking about my finances differently.

But ultimately, I decided that I valued my time more than I valued the money I was earning.  Ask me again in 12 months’ time, but right now I wouldn’t go back to employment for all the tea in China.

easy for you to say

I hear you.  It’s easy for me to enthuse about lifestyle changes when I’m childless, mortgage-less, debt-free and have no dependents relying on me.  That’s all true.  But I still have financial obligations.  I pay a staggering amount of monthly rent and council tax on my flat (London, I love you dearly, but you’re killing me).  I don’t have a pension, stocks or shares or any other security, except the cash in my bank and my earning potential.

I’m not here to tell you that my way is the best way.  That everyone should quit their jobs, eschew material things and live like financial nomads in pursuit of spiritual enlightenment.

It’s just that I’ve realised that this is the best way for me, right now.  And maybe it’s something you’ve wondered about.  In which case, use what I’ve learned so far to see what your options are.

you do the math*

I’m a little scared of money.  I didn’t have a lot growing up, so I’m probably more fearful than most about not having enough.  In my last job, I did a lot of forecasting and financial modelling for investment raising and I learned to read a balance sheet, P&L and cash-flow statement.  So when I was trying to decide if I could afford to leave my job, I applied that learning to my own finances.

Personal balance sheet

Crucial first step: you need to work out what you’ve got in terms of assets and liabilities.

If you’re a whizz on excel, then start using a spreadsheet for your personal finances.  It does all the number crunching for you, so you’re less likely to make mistakes.  Otherwise, just write it out old-school in a notebook.

You need two columns: Assets and Liabilities.

Under the “Assets” column, list out all your assets (the value of your house/flat/car, cash in the bank, stocks and shares, pension, ISAs, premium bonds, etc.).

Under the “Liabilities” column, list out all your liabilities (your current total mortgage owing, credit card debts, car repayments, etc.).

Deducting the total amount of Liabilities from the total amount of Assets, gives you your basic net worth in money terms.  It will either be a positive number (i.e. what you own is greater than what you owe) or negative (i.e. what you owe is greater than what you own).

Remember, it’s a snapshot of this moment in time and will change, but it gives you a good indication as to whether you have assets you can free up to finance your lifestyle change.  Don’t panic if the picture looks bleak.  A negative personal balance sheet doesn’t mean you’re stuck as a wage slave forever.  It’s only part of the equation.

Cash-flow

Next, you need to work out your average monthly cash-flow, so you know what you need to earn to meet your commitments.  For this you need 3 columns: a blank first column, then “Monthly Income” and “Monthly Expenditure”.

In your first column, list out each category of income and each category of expenditure, as this allows you to do a more detailed projection.  Then deduct the total expenditure from the total income, to get your balance.

It should look something like this:

Do this exercise for at least 3 months back (go through your bank statements to work out each month’s expenditure).  This will help you to then get an average of your monthly income and outgoings.  This is essential before you even begin to consider giving up your salary.

You need to know that your assets (from Step 1 above) and your non-salary income are sufficient to meet your expenditure requirements going forward.

Remember: not all assets are created equal.  Cash is king, because you can get at it readily.  Having a house that’s worth a lot of money does not help with cash-flow, because it will take time to remortgage it or sell it to get cash in your hand.

what’s the plan, Stan?  

It pains me to tell you, guys, but quitting your job and going solo does require a bit of planning.  There’s nothing that sours the satisfaction of giving the 2-fingered salute to full-time employment like having no way to pay your rent next month.

So don’t rush it.  It’s rarely so bad that you can’t stick it out a couple more months.

You’ve got your balance sheet and cash-flow data, so use it to forecast your new life.

1.     Improve your cash-flow (or stop spending so much goddam money on stuff you don’t need)

  • I’m not a massive consumer (unless you count booze, in which case I’m right up there with the best of them).  I’m also pretty thrifty.  I have spidey sense to spot the “reduced to clear” stickers in the supermarket.  I rarely shop for clothes and, when I do, I sell a load of my back-wardrobe on eBay (seller name raghi77 if you’re interested…).  Before you buy anything, ask yourself if it will help or hinder your new lifestyle.
  • I spend my money on experiences – travel, festivals, gigs, nights out with friends, spa sessions.  These don’t come cheaply, but they do tend to come less frequently, so it helps with cash-flow.  I also tend to pay for these on a cheap credit card (look for 0% balance transfers and purchase deals on moneysupermarket.com), so I have longer to pay them off.
  • If you can start up your business by working on it during weekends/evenings around your existing job, then for gawd’s sake do that.  Keep the money rolling in from your salary to finance it, so that the financial risk is lower.
  • Consider going part-time or freelance for your existing company.  You may feel like you couldn’t stand to work another day, but you’d be surprised how differently you feel once you’re in control of your time.
  • Before you quit, sign up with some temp agencies for your specialism.  Knowing that you can get a few weeks’/months’ work here and there as you need it helps to keep the fear gremlins at bay.
  • Separate your bank accounts.  Put the majority of your savings beyond easy reach somewhere where it’s earning a reasonable rate of interest.  Set up a standing order to feed your monthly cash requirement into your day-to-day account and have a second current account with a buffer amount in it, for contingencies.  Then learn to live within your means (easier said than done!!).

2.     Weave your safety net

Ask yourself what you could realistically do to get money in if you were in a tight spot or to finance your new business plans.  For most people, this will mean looking at your assets on your balance sheet and working out how to make some money out of them. For example, you could:

  • rent out / sell / remortgage your house
  • cash in stock options / ISAs / pensions
  • borrow money
  • sell other assets (car, clothes, furniture)

Clearly these are big decisions and should not be taken lightly unless you derive perverse pleasure from riding a financial rollercoaster.  But what I’m trying to get across is that most people have options when it comes to money.  These options may seem terrifying and some may be totally inappropriate for your circumstances, but they should all be factored in to your financial planning.

Knowing that you have a safety net (or starting to weave one) allows you to shift your focus away from simply surviving to creating your new life.

I am fortunate that I have a reasonable amount of money saved up to support me.  But I’ve also downsized my living arrangements, cashed in my Oyster card (getting around by bike also keeps me fit), stopped getting my hair cut so frequently and haven’t been into a clothes shop in 6 months.

I’m still working on cutting down on my £10-a-pop cocktail habit…..

 *sorry for the Americanism, but it scans better…

Advertisements

Thoughts??

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s