From Employee to Bootstrapper

How I Prepared my Finances Before Bootstrapping

Earlier this month I left my cushy developer job at Amazon to work for myself. I am 35, living in Seattle with my wife and two small kids, ages 2 and 4. I’m starting this quest for an independent lifestyle with no business and household income yet, and my target is to cover my family’s expenses from my new work before I run out of savings.

Savings

On my savings balance I’ve set a surrender threshold of 6 months’ worth of expenses, and if it dips below that line I will abandon this route and go get a job again. I’m quite confident I could find a job within a couple of months that makes ends meet, but I’ve reserved six months coverage just for the extra precaution.

I realize that $1M in savings is an exceptional amount of money for many people considering a similar path. However, I believe I would have still left my job and gone this route even with savings that covered just 1.5 years of expenses. One year of runway is a reasonable amount of time to give something a shot, with the other 6 months to fall back to the job market if things don’t work out. Also, remember that even if you start with one year of covered expenses, the runway will grow longer as soon as you start making money. You don’t need to break even immediately within the first year.

For example, in my case, I’m starting with 5.5 years of covered expenses. If I simply manage to add $250 of linear income growth per month, I will break even with my expenses in my fifth year while still staying abundantly clear of my surrender threshold. This projection is what gave me the most confidence in taking the plunge now rather than continue to defer it. The $250 is just an income growth target that assures me I won’t run out of savings if I meet it. (I open sourced this spreadsheet on GitHub.) And adding $250 per month with a digital product in a global marketplace seems doable. For example, if I built a $50/month SaaS, all I’d need is 5 or 6 net new customers per month (depending on operating costs). I’m not expecting it to be easy, but I can see this happening.

The purple line is my savings balance with $250 of linear income growth per month.
The gray line is my savings balance with no income at all.
The red dotted line is my surrender threshold.

Expenses

Here are my current cash outflows, averaged per month:

The last item is a very conservative budget, and barring any emergencies, I don’t expect to have to spend it all. But the rest are basically my fixed costs. If the circumstances were different, I might have looked at trimming some of the expenses, but it actually doesn’t make much difference in my situation. Obviously, I still retain the option of trimming some expenses in the future, but I’m not expecting to do so right now.

Health Insurance

It also turned out that Washington state requires the purchase of dental insurance if you have kids and you buy health insurance through the ACA marketplace. I wouldn’t have bought it if it was optional, but since I had no option family dental coverage added another $125/month to the bill.

I was able to enroll in the new plan before I left the job, and I didn’t need to provide any evidence or documentation for the special enrollment.

Life Insurance

My experience with LifeQuotes was okay. The whole process from applying online to activation took nearly 3 months, which was longer than I expected. Apart from a health check, the underwriter also required tax returns and detailed asset disclosures. I don’t really know why they needed that, but I suspect the financial situation of the insured might be linked to fraud risk — even though it seems difficult to commit fraud with life insurance!

I completed this process while I was still employed, but I think it wouldn’t have been a problem doing it after I left. However, I still recommend getting life insurance while employed, since it makes the financial questions much simpler to answer.

Disability Insurance

I would actually have preferred to get $15K/month, but since I also had disability insurance of $25K/month from Amazon, my total benefit would have exceeded my salary, and the underwriters consider that over-insurance. Again, I suspect this has to do with fraud risk, because they really insisted on not taking my money. At least the benefits from disability insurance obtained privately are not taxable, so I would be able to keep the whole $10K/month if I ever were to claim.

I searched for this insurance through an online broker called Policygenius. The overall experience was better than LifeQuotes, and the process was completed in 2 months.

Umbrella Insurance

While I was on the Geico website, I also made sure that I was maxed out on all the liability coverage on my auto insurance. I have it at $1M injury and $500K property damage, which is the maximum allowed. To lower my premiums a bit I increased the deductible to $2,500. Just like with health insurance, I don’t need insurance for repairing a scratch. I just want it to avoid financial ruin.

Retirement Savings

As a small optimization, I will likely convert my 401K to a Roth IRA sometime this year. The conversion will require me to pay income tax on the $180K, but since this year’s tax brackets will likely be the lowest I will ever be in, this seems like a good strategy. A Roth IRA grows tax-free, and withdrawals are not taxed.

Home Equity

It took me about 3 months to close the refinance, but that’s because my property is in a mixed-use zone, which spooked many lenders. A regular single-family home should be able to be refinanced in about a month. My total closing costs were about $3.5K.

While I was shopping for the refinance, Key Bank also offered me a $150K line of credit at 5.5% interest at no cost and with no withdrawal obligations. They didn’t even require an in-person appraisal. I took that as well, and it closed within a couple of months.

Investments

Also out of paranoia, I’ve split my positions across two brokers. Since I’m going to depend on this money to put bread on the table, I didn’t want all my eggs in one basket.

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