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Key to the Pivot: Extending Runway
I was recording a podcast episode with Dave Kline (@dklineii on twitter), probably my favorite interview to date, and I can’t wait to release the episode soon.
Dave was a high ranking COO at Bridgewater - arguably the largest and best hedge fund to ever exist. Needless to say, when it came to money and security, Dave had nothing to worry about.
But when he decided to make a career pivot to work for himself do you know what was the first thing he did?
Made sure he knew how much “runway” he had.
Yes, this hedge fund veteran went through an extensive exercise to understand how long he could last making $0 income before he put his family at risk. He even downsized his home right away.
How to calculate your runway
Your runway is basically the amount of time you have to complete whatever pivot you are trying to execute.
Simply take the amount of money you have saved up plus any income coming in and subtract your monthly expenses (to live) along with any extra expenses needed for the pivot. These could be networking expenses, licenses or other startup expenses.
If we ran an example it could look like this where I have $15,000 saved up and I can make $2,000 per month from a side hustle. My monthly expenses to live are about $5,000 and I need to spend $2,000 to buy some equipment to start my business.
Step 1: Burn rate
The first step is we need to figure out how much more you will be spending per month than you are bringing in. This is easy, take your monthly expenses and subtract any income. In the example, my burn rate is $3,000 per month.
Step 2: Cash available
Here we take the amount of cash you have earmarked for your transition, and we subtract any known one time expenses that you will have to execute your pivot such as LLC, licenses or software fees. In my example I have $15,000 in cash and I need to spend $2,000 that I know about.
Step 3: Divide net cash by your burn rate
Here’s the example spreadsheet if you want to take a look. I have $13,000 in net cash and I divide this by my burn rate to get about 4.33 months of runway.
As you can see in this example, I only have a little over 4 months before I completely run out of money. I don’t know about you, but that got my heart racing a little bit.
When you are looking to pivot to a new job and you still have your old job, your runway could be infinite, and only constrained by the artificial time limit you give yourself to find a new job.
But if you’re looking to pivot to starting a business or working for yourself, runway is most often constrained by the amount of money you have or are willing to part with in order to fulfill your dream.
Best ways to extend the runway
Executing a change is hard, and I know from experience it usually take much longer than estimated. We need to give ourselves breathing room to make mistakes, learn and be successful. To do that, we need more runway. Here’s how.
Don’t quit your job
So many “experts” are out there telling you to “self actualize”, “burn the ships”, and “be bold”. This is hogwash that can add unnecessary pressure or put yourself and family at risk. You need income and your current job is the best way to keep an income.
No, I don’t care if:
your job sucks
your boss doesn’t value you
you’re not living your “passion”
That’s why we’re plotting the Break out in the first place. Keep your eye on the prize.
Trim your expenses
Burn rate is your income - your expenses, if you are spending less than you are bringing in, then you extend your runway. Dave Kline in my intro (who is financially independent) chose to unload a house he had just renovated and downsize. That may be a drastic step, but it got his runway to a spot he was comfortable with.
Every time I have pivoted I’ve trimmed expenses, even when I’ve reduced risk in other ways because the truth is you just don’t know if your pivot will succeed or how long it will take.
Supplement your income
Ideally, you’d be able to supplement your income through a method that doesn’t require you to sell your time - you need that to execute the pivot. However, your runway is more important. With an infinite runway you can execute any pivot. Of course diversified passive income is the holy grail that I am still working towards so I understand how difficult this can be.
So, I think freelancing is the best path for most people to transition out of a job, because it is so easy. Even if you ultimately don’t want to be a freelancer, you can supplement your income by freelancing out your skills to other clients.
In the example above, each $1,000 brought in extends your runway by an extra 10 days.
Boost your cash cushion now
Save money, blah, blah, blah. But the truth is money is a tool to solve your problems. You will encounter plenty of problems and extra expenses on your road through the pivot. To finance your pivot, you need money. Start packing some extra away now to:
make up the difference in your income
pay for startup expenses
be ready for the unexpected
How much cash do you need? That depends on how long you want your runway to be.
When You’re Ready
There are a few ways we can continue building the BREAK community together.
Follow me on Twitter (@mngardon DM’s open) or Linkedin (anyone can contact me)
Suggest a topic or improvement by reaching out to info@careercloud.com
Work with me 1:1 to plan your career change (6+ career pivots under my belt). I’m currently booked out 4 weeks. Contact Ryan@rejoinmedia.com to book. $150 for 45 minute session.
What’s happening on the pod?
Oh man, speaking of career pivots! Here’s my chat with one of the most legendary career pivots of all time. Jeff Rose went from financial planner dealing with clients to financial blog superstar to youtuber!
This is a great example of creating optionality, following your curiosity and believing in yourself.
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