Business Ownership or Rat Race?
Since quitting our corporate jobs 13 months ago, my wife and I have been shaking in our boots wondering if we had made the right decision. We had set a goal in May of 2018 that we would have a net worth of $1,000,000 in 5 years. It honestly felt impossible at the time, but I felt that if we didn’t start thinking big, we would stay small forever. So, we made the goal. We ran the numbers and felt that our corporate jobs would not get us to the $1,000,000 mark in the time frame we were looking for. With this in mind, my wife and I quite our jobs and dived into business ownership with the theory that going it on our own, and having more control of our income, would allow us to hit our financial goals faster. As a side perk, we get to work together every day. We are the type of couple that prefers to spend every waking minute together. This probably is rooted in the fact that we had about 10 years of living on opposite sides of the country and only being able to talk on the phone or text. We finally are under the same roof, and we realized that self-employment allows us to work towards our goals together. Luckily, we are a good team. We enjoy working together and play off each other's strengths.
Here we are, 13 months plus later, and we decided to actually sit down and calculate where we are financially. Is our theory proving to be correct? Had our decision to quit our corporate jobs and go it alone allowed our net worth to grow faster than if we had continued to earn and save?
Below is our net worth chart. The first column shows where our investments currently sit. The second column shows our net worth when we quit our corporate jobs. The third column is, to the best of our ability, a projection of where we would be a year later if we had continued at our then savings rate of about 65-70%. We added in the percentage growth that our retirement accounts earned plus the dollars that we would have contributed. Please note, these are truly just projections. Finally, the last column shows what our actual net worth is today. The red color indicates that we lost money by quitting our corporate jobs. The green indicates that we are in a better place than if we had continued working in our corporate jobs.
As you can see, our overall net worth is significantly higher than if we stayed in our corporate jobs. We were very relieved to see this. However, there is a lot of red in our current net worth column. We moved a lot of personal cash (around $80,000+) to start our main business. This led to our cash savings going down. However, the business has started paying us back. This month, we were able to pay ourselves back with interest $20,000 of the initial $80,000. From my previous post about the growth of our business, we are now able to pay that cash back at a quicker rate. We project to have all $80,000 paid back (with interest) by the two-year mark.
Also, there is the concern for lost gains in our retirement funds. This has been painful to forgo a year of investing in our retirement. We have invested a little, but we are talking just a few hundred dollars compared to our usual $20,000 +. We are committed to maxing out our Roth IRAs this year (2019), which equates to only $12,000. We’ll need to grow our business further in 2019/2020 to start hitting our retirement savings rate (stock market version) of our corporate jobs era.
You may wonder why we have such a large cash amount in savings. We are trying to purchase our first home. Our plan was to buy a modest home that we could run our consulting and commercial cleaning business out of, as well as house hack by renting at least one of the spare bedrooms on Airbnb. We felt we could pay the mortgage off in 5 years and use it as a rental when we step further back in our management rolls in our commercial cleaning business. However, we’ve come to find that because we are self-employed, we don’t qualify for traditional financing. It will most likely take another two years to qualify for a traditional home loan. By then, we feel we would be close to paying cash for a home. Now we’re going to have to get creative... We want to get into the real-estate game sooner than two years from now, we just don’t know how and when. That is the long explanation as to why we continue to build our cash reserves. At this point, we are earning 2.2% at Ally bank, but that still doesn’t keep up with inflation, where real-estate typically does. So, we are on the hunt to put our money in some real estate. I’ll keep you updated there.
The business valuation is based on an asset sale only. Just the value of our license, equipment, vehicles, cash in the bank and account receivable. It also accounts for the debts of the business including our business credit card and other small liabilities. We must keep in mind that a business is only worth what someone is willing to pay for it. I leaned towards the conservative valuation of the business. If I had to liquidate it today, that is the minimum I think I could liquidate everything for. Another thing to keep in mind, is that the first year of the business has been the most aggressive and difficult. I’m not projecting this much growth in value for our second year of business.
Another side note is my wife works remotely for her former company as an engineer. She picks up projects as they need her, and she gets paid well. However, she gets paid by the hour and the hours haven’t hit the 20 hours a week mark that we were hoping for. Things are picking up, and the good news is that her entire paycheck goes into our cash savings account for our real estate investment.
Self-Employment can lead to Financial Independence (FI) in a faster and happier way compared to the Rat Race.
Tracking and knowing the numbers of your business is REQUIRED! No scraps of paper, No “I think I’m making money”. I use Quickbooks Online so I can easily download all my transactions and access my numbers from anywhere.
Diversify your investments to more assets than just your business. It’s tempting to keep pumping money in your business, but it’s never good to put all your eggs in one basket.
Going into business for yourself CAN lead to a better quality of life. The first few years can be very difficult, but once you’ve set up a strong infrastructure (delegation), you will begin to feel the freedom you’ve longed for.
Quitting my very comfortable corporate job was one of the scariest things I’ve done in my life. I think my wife would agree with me. However, the empowerment that we feel over our own future and finances is intoxicating.