Can you afford a pay cut?

In order to fully commit your attention to building something that isn’t yet making money, you can either work more hours, or get by on less income. The former isn’t healthy or sustainable, and the latter isn’t easy.

When you have the golden handcuffs of a large regular paycheck accompanied by health insurance and other benefits, it’s hard to imagine living on less income. It’s rare that people actually quantify the effect that starting a business can, and likely will, have on one’s income in the short-term. So, to help put things in perspective, here are real numbers from my tax returns before and after.

In 2007, I made $86,978 and had a full suite of benefits. My income came out to around $71,417 after taxes. January 1st, 2008, I quit my job to focus my efforts on Sifter knowing that I could freelance to make money when I needed to. In 2008, the year that I built and launched Sifter, I made $36,124 and had no benefits. After taxes, I made about $24,832.

My first year after quitting my job, I made 41.5% of my previous income. If you factor in self-employment taxes and look at take-home income, I brought in 34.7% of what my previous salary was. That’s a lot of Ramen noodles.

The only way that was possible for me was by being debt free, saving up prior to leaving my job and cutting my personal expenses. I could have always made more money by doing more freelancing, but that would have taken time away from building Sifter. At the time, I wasn’t married, didn’t have kids, and didn’t have a mortgage, but all of those followed shortly thereafter.

Everyone has their own scenario and own challenges, but I’ve found that quantifying these things paints a sobering picture of “bootstrapping startup life”. My guess is that the reason that many people raise venture capital is precisely because of this fact. They simply can’t afford to take a pay cut. It certainly used to cross my mind.

If you want to start a business, the most important thing to recognize financially is that you are your biggest cost. Your car payment. Your mortgage. Your family. Your lifestyle. Your unsecured debt. Your savings. The easier it is for you to survive on less income, the less stressful your journey will be. It means fewer distractions, more time to build your product and generally a more pleasant trip.

Save. Delay quitting your job as long as possible. Cancel cable. Sell your TV. Sell your car and drive something cheaper. If you’re really extreme, downgrade your home or even move to an area with a lower cost of living. It’s not easy, but it’s an option. Ruthlessly trimming your personal expenses is just as important as ruthlessly trimming your business expenses. When you’re bootstrapping, they’re one and the same.

P.S. If you enjoyed this, you might like my upcoming eBook, Starting + Sustaining about bootstrapping your own web application.

5 notes

  1. garrettdimon posted this