Entrepreneurship is great due to the high correlation between effort and success. If you want autonomy and believe you have what it takes to create income out of thin air, go for it! There’s nobody to blame for your failures, just like there’s nobody to reward but you for your victories.
Anybody who incessantly complains about their job should just give entrepreneurship a go – they will probably never complain again. A day job is a walk in the park compared to entrepreneurship because of the necessity to wear many different hats e.g. accountant, operations, marketing, sales, producer.
What I’d like to do in this post is provide a rough estimate of how much you have to make as an entrepreneur in order to make equivalent money as a worker bee. Hopefully this post will give you a better idea before taking a leap of faith. After all, you don’t want to quit your job and die alone do you? There’s no honey when you got no money.
ENTREPRENEURIAL INCOME NEEDED TO REPLACE A DAY JOB INCOME
Take a look at this chart I put together based off a $100,000 day job salary. There are two components to the chart: 1) How much your day job salary is really worth after adding up all the benefits, 2) How much an employee doesn’t have to pay because s/he is not an entrepreneur.
* True Value Of Your Day Job: I’ve used very typical benefits given to a $100,000 a year employee. Clearly some companies will provide more paid vacation, less 401k matching, better ongoing employee training, and higher cost of living raises. In some fields such as banking, a bonus can be equivalent to multiples of base salary. But overall, I’m making an estimate that the true value of your job is worth 1.3X your salary (see top half of the above chart “What You Get As An Employee” $130,800).
* Contractor Salary Conversion: 1.3X is also the multiple I believe a contractor can use to calculate how much more s/he needs to earn to make an equivalent day job income. A contractor forgoes benefits such as health care, paid time off, pre-tax retirement plan, 401k matching, options, life insurance, disability, and guaranteed 40 hours worth of full-time work a week. Some contractors actually charge much more than 1.3X a day job equivalent rate.
* Business Type: I use an asset-light business model e.g. internet. There are some businesses that are very capital expenditure heavy. But these are businesses that individuals would probably not go into. If you assume an individual gets into a retail business such as selling baked goods or clothing, “Office” rent would shoot through the roof, as would costs of goods sold.
* Accounting Assumptions: All the items under “What You Don’t Have To Pay As An Employee” are all business expenses. As a result, the $29,650 can be deducted from revenue to lower taxes. If we assume a 30% effective tax rate, the true cost goes down to roughly $20,755, making the grand total needed as an entrepreneur to replace day job income closer to 1.5X. Furthermore, the OASDI + HI employer expense phases out at $117,000, which means there is convergence at higher income levels. The reason why I keep the 1.6X multiple in the chart is to be conservative. If your total business revenue was $30,000 your first year, but you had all these necessary expenses, you’d end up with hardly anything left to live. Whereas an employee making $30,000 will breathe much easier.
* Entrepreneur Operating Income Requirement: I estimate an entrepreneur needs to make 1.6X more than a day job income to come out the same. The range is probably somewhere around 1.3 – 2X for the majority of cases. As you can see from the chart, an entrepreneur must pay extra taxes, fees, and expenditures for growing his or her business. The fun kick in the pants is that if an entrepreneur fails, s/he cannot claim unemployment insurance despite the taxes paid. With higher income levels, there is operating leverage for the entrepreneur as s/he doesn’t have to work as hard for the same income. I estimate at income levels above $500,000, there is a lower multiplier necessary for an entrepreneur to replicate a day job income.
TABLE FOR CONVERTING ENTREPRENEURSHIP INCOME TO DAY JOB INCOME
This is a handy dandy chart if you are currently an entrepreneur looking to give it all up and go back to a day job since it’s so much easier. As you can see, you don’t have to make as much working for someone else as your employer will take care of a lot of the expenses you once incurred. This chart is also a great way to compare yourself to entrepreneurs who publicly highlight their income. The higher the numbers, the more skewed the results.
TABLE FOR CONVERTING DAY JOB INCOME INTO ENTREPRENEUR INCOME
This chart is very important to study for all who want to engineer their layoff to become an entrepreneur. I’m telling you from years of experience that making an equivalent entrepreneurial wage is very difficult. But, if you start to gain traction, the freedom and satisfaction you gain helps make up for the income difference. At higher income levels, the numbers become skewed in the entrepreneur’s favor given the OASDI + HI tax caps out at $117,000 and there is more operational leverage as an entrepreneur.
THERE IS A MENTAL DISCONNECT
What’s interesting is that converting entrepreneurship income to day job income seems more reasonable (2nd table) compared to converting day job income into entrepreneurship income (3rd table). For example, I can see how $250,000 in entrepreneurship income is equivalent to about $156,250 in day job income based on experience. There are plenty of $156,250 a year jobs one could get if they no longer want to be a $250,000 a year entrepreneur e.g. consultant, banker, lawyer, engineer.
It’s harder to grasp that one needs to make $250,000 a year as an entrepreneur to replace their $156,250 a year job. If you look at higher income figures, it gets more daunting e.g. $400,000 in entrepreneurship income to replace a $250,000 a year day job. The good thing about entrepreneurial income is that there’s a lot more upside and leverage. Furthermore, you’re creating a business as an entrepreneur that could one day be sold.
The reason for this disconnect is probably my own bias for not having achieved in entrepreneurial income the maximum amount I achieved in my day job income. Most of us are worker bees, hence trying to comprehend entrepreneurial income is more difficult. The other reason for the disconnect is that I simply don’t know that many entrepreneurs who are making $250,000 a year or greater in operating profit before tax. Whereas there are plenty of people I know making $250,000 or greater at their day jobs. Heck, even our retired SF police chief makes around $250,000 a year in pension money.
GO THE HYBRID ROUTE
I’ve really spent a lot of time thinking about these charts as a person who went from 13 years as an employee to two years as an entrepreneur. I’m sure my views will change further the more entrepreneur years I have under my belt. But for now, I encourage every day job employee to really think about the numbers above before taking the leap of faith. Read the post about quitting your job and dying alone. Read the post about how a day job is so much easier than being an entrepreneur. Then really think about your own abilities.
One thing employees take for granted is the consistency of their paycheck. Every two weeks or every month you will get paid so long as your company isn’t going bankrupt. As an entrepreneur, each month is an adventure. Take for instance a campaign I did back in November for a client. It took me five and a half months to get paid. And this is after sending them multiple invoices and e-mailing them constant follow-ups. Imagine if it took you five months to get paid your salary. Never take your paycheck for granted.
If you make $120,000 as an entrepreneur, it’s not bad, but it’s really only equivalent to about $75,000 a year as an employee. My recommendation is to moonlight for as long as possible until you know with great certainty that your entrepreneurial income can cover all your basic expenses for six months in a row. That is the point where you should feel confident to take the leap of faith and go for entrepreneurial glory!
Negotiate A Severance When You Leave: Part of the reason I’m typing this post today is because I was able to negotiate a severance package from my day job of 11 years that provided for six years of living expenses to pursue my dreams as an entrepreneur and writer. Moonlighting on your side business while working your day job is really the way to go because most businesses fail. If you want to learn how to negotiate a severance package, check out my book, How To Engineer Your Layoff: Make A Small Fortune By Saying Goodbye. Never quit, get laid off instead.