This is usually a question that can be answered by the size of your emergency fund. In fact, this is the whole point of having an emergency fund. If you don’t know it by now, I’m not a big fan of emergency funds. I actually don’t have one and I use my lines of credit/credit card as an emergency fund. So you are probably going to tell me; “if you ever need liquidity, you will pay a huge load of interest!”. You are right… well, if I ever get to this point though.
“How can you be so sure that you will never need your emergency fund?”
The question seems legitimate; nobody is shielded against catastrophe. This brings me down to the most important question: How Many Weeks Can You Hold On Without Working? The very first step to answer this question is to answer first answer another question:
How much do you need per month?
When answering this question, you need to get down to the basics; paying financial obligations, eating and taking care of your family. Restaurants, wine and activities are not part of your priorities ;-).
I have calculated that I could live on a budget of $3,500 per month. Therefore, I need to know where can I withdraw my $3,500 per month and how many months I can hold on before things get very bad…
The normal reflex would be to check with easy ways to withdraw money:
– look at your emergency found (my case: $0)
– look at my lines of credit (my case: $7,000 so 2 months)
– look at my retirement investments (my case: $23,000 so another 6 months)
So in my case, I could hold on for 8 months or so without having to sell anything (like my second car or my house).WRONG WAY OF THINKING!
What if I tell you that I can hold on forever on a $3,500 monthly budget?
Instead of looking at how much and where I can withdraw money, I have asked myself how much and where I can make money ;-D. This is where my company comes into play. We have a special agreement my partner and I (told you I was happy to have a partner!): if one of us loses his job, he can work full time for the company and be paid according to his monthly budget needs (survival budget needs 😉 ). So far in 2011, the company income is averaging between 7K and 8K per month. If I was to lose my job, I could cut my business expenses to roughly $24,000 per year. In fact, I could cut down on my VAs and most of my writers’ budget (which is, by far, the biggest part of my expenses). This would leave me with basic expenses (telecommunication, accounting, hosting, etc).
Therefore, this would leave the company with a net income of about $5,000 to $6,000 per month. This is more than enough to cover my $3,500 budget. Then, I could technically live without my day job and keep my house, my cars, my insurance and feed my family without any problems. This is the first step in my quest to financial freedom; being able to live without a day job.
What is interesting about this thought is also to wonder where I could bring my company if I was to work full time. I’m already seeing some interesting improvements with my 2 VAs (wait to see my March income statement!) so I guess it would just go faster if I was working 40-50 hours a week ;-).
While I know I can do it, I am far from being ready to quit my day job. I think I have too much debt right now and I would feel uncomfortable leaving such a great job. In addition to that, I would rather keep my 2 VAs working for me as I really appreciate them and I would be torn to lay them off. On the other hand, it’s always comforting to think that I can hold forever without working at my day job ;-).
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