Friday, October 4, 2013

When to leave your job and go for it on your own

I get a bunch of random messages on facebook sporadically with people asking me one of three things:

“What the fuck do you do for a living, I want to travel also”

“How do I get good at poker, I think I will do that for a living”

And “I want to leave my job but am too nervous to, any advice?”

Well the answer to the first question is that I play poker on the internet mainly and travel.  I am also pretty diligent and good with my investments on the side as one must learn to make their money work for them.
The answer the second question usually leads to me going on a rant about how very few people can get good at it.  In addition to the steep learning curve, it is even more seldom to ever make substantial money from it.  Lastly, you need to give up all your family and move out of the USA with whatever money you have praying that you will be the 1 in a long shot person.  Tis’ not intelligent at all.

The third question is the most intelligent question that I get, and one that I try to truly help people with if they have the right attitude and are willing to push themselves.  As with everything else in life…this too comes down 100% to mathematics.  I will be able to keep them fairly basic in this blog and hopefully it can help some people that are thinking of quitting their jobs and starting something on their own.

The first step with figuring out if you can go this route is to come up with everything possible you can think of that should be included in your decision.  It is okay if this takes some time, you can alter your equations as you go.  I will for sure leave quite a bunch of them out of this blog as I am writing this on the fly, but that is fine as I am just trying to give you the gist of how to approach this.  The factors off the top of my head that I would include:

1)      Current savings (debt included if applicable)
2)      Current Salary & estimated future salaries
3)      Initial self-employment income
4)      Future self-employment income
5)      Ease of returning to old work force in same position
6)      Chances of making it with your business
7)      Happiness at current job
8)      Company retirement perks
9)      Happiness if self-employed (guess work included here)
10)   Tax Implications

If you analyze the list, you will realize that only 2 of the points that are tangible figures, and that the rest will be decided by values that you give to them.  People may have trouble assigning values to these, but it is something to keep practicing with a lot of your life decisions until you hone the skill to more accurately assign values.  Generally, people thinking of making this decision factor in numbers 1, 3, and 9.  They also tend to over value number 3 by a long shot, while leave out the other factors that also bring down number 3.  Due to this, the majority of people are left with a lopsided equation that is very incorrect when approaching this problem.  I understand why this happens as it is how the human brain is hard wired.

The first issue with how the brain works is that it over values one’s ability more or less, always assuming that it will go well.  While this is a good positive mindset, it is not realistic and the person needs to properly assess all risks and assign more accurate projections.  The second issue is that people do not approach it as a math problem and simply go, “I want to work for myself, I think I will go for it”.  When they do this, they are thinking of a few of the bullet points, but not all of them, and more importantly, they are not weighing them in properly.  This leads to my attempting to give a solution for people thinking of going down this route.  Please note that I left out some bullet points that I did not think of off the top of my head, and your values could be completely different than the ones I use in my example.  THAT IS COMPLETELY FINE, THE BIGGEST STEP IS RECOGNIZING THE MATH, AND approximating the values to the best of your ability.

First we will try our best to set up an equation, ultimately it will be a greater than or equal to equation, which means we will have to determine which factors to place on each side.  Initially I did it with powers as that is how you find your future earn with future salaries, but I began to do way too much math and it became confusing and potentially incorrect, I’ll leave that at the bottom of the blog if anyone wants to view it.  For this though I just used initial salary to a power and did not factor in initial and future to keep it simpler

((Initial Salary ^ (1 + 0.1n)) * chances of making it) * tax implications + happiness + current savings > current salary^ (1+0.01n) + retirement perks ^ (1+0.03n)   + happiness + current savings

Now let’s assign some values to are tangible… current salary is $50,000…but you can make life simpler and just divide by 1,000 and work with smaller figures, so we’ll denote current salary at 50 and $8,000 for retirement perks or 8.  We will use $20,000 or 20 as our current savings.

Where n = number of years at job, starting with year 1 and increasing by 1 with each passing year
*anything to the 0 power is equal to 1, thus future income will not be a large number off the bat.

I have left out he ease of returning to your work force as it’s something that can easily be factored in whenever the situation is close to neutral, it can be the deciding figure in that case.

Let’s plug in the tangible figures for year 1 (n=1)….
((Initial Salary ^ (1 + 0.1n)) * chances of making it) * tax implications + happiness + 20 > 50^ (1.01) + 8 ^ (1.03)   + happiness + 20

Giving us a simpler
((Initial Salary ^ (1 + 0.1n)) * chances of making it) * tax implications + happiness + 20 > 52 + 8.5 + happiness + 20

Now for the non-tangible figures which is the tough part.  Let’s take our initial salary at a base of $30,000 (30).  The chances of making it are where most people over estimate their own ability and that is bad.  You should map it with stuff you have a strong grasp on.  If you work at 150% higher capacity than colleagues, or outperform people at that rate with most tasks, then let’s take the average chance of making it and multiple that by 2.5 (100%+50%).  Let us say that people in our field of choice succeed at a 20% success rate.  This means we are succeeding at a rate of 0.2*1.5 = 50% or 0.5.
Tax implications, this is so dependent on how you file your corporation, but self-employed people get hit with higher taxes so let’s put this at 90% or 0.9.

Now Year 1 looks like this:

((30 ^ 1.1) * 0.5) * 0.9 +20 + happiness > 80.5 + happiness
39 + happiness > 80.5 + happiness

Ok, in this scenario our happiness of working for ourselves will have to be massive to overcome the large different…but let’s take a look at down the line.  You can solve for equilibrium points by solving the equations for the variables, but I will not delve in to that here.

Year 4
(((30 ^ (1.4)) * 0.5) * 0.9) + happiness + 20 > 50^ (1.03) + 8 ^ (1.12)   + happiness

We get

73 + happiness of self-employment > 89 + happiness with our company

From this, we can see that probably at this point, with our self generated figures for happiness that we will probably be at this point to the breakeven point.  Thus from all this, I’d gather that if you wanted to do it for 4 or more years then to go for it.  Now, be careful, I formulated a random formula from what I considered important.  Your figures can vary drastically from these, as well as your occasion.  The main points are to factor in what are the most important things to you, as well as being able to put realistic numbers to figures that are not tangible.  I hope you enjoyed, I rushed this one a little on my own with no proof reading.  I’ll re-read and edit some tomorrow.  Leave any comments below.  GL BEING SELF EMPLOYED.

I went more in depth below and got off on a tangent doing a little more complex math and confused myself a little so I knocked it out to keep it simpler, read on if you’d like to see what I was working on originally. Enjoy the weekend!


Let’s explain the equation in detail, we are adding in how much we will make now and in the future at our job, with the factor “n” just denoting time in years.  We put in our discipline and drive, our current savings, as well as our happiness in to the positives for self-employment.  Tax implications are deducted as self-employed persons from the USA (myself), have to pay an extra 15% on their income which is ludicrous.  This will vary depending on the corporation or company you set up as, so do your own research on this.
On the other side, we have our current salary plus our future salary, as well as our happiness and retirement perks.

The hardest part is assigning values, if we take our income now and give it a value of $50,000…this will make the other numbers very tough to factor in and make it a mess.  This is why you should learn to simplify and reduce equations in to simpler forms to work with.  Thus, if we assign our income a value of 50, this will make the whole process easier.  For this problem, I will use random values I am assigning to each.

Current Salary = 50 ($50,000)
Current Savings = 15 ($15,000)
Initial Self Employment Income = 10 ($10,000)
The rest we are going to have to come up with on our own.  For future incomes, we can use our current values of salary and projected salaries, as they will increase at a factor that was denoted above.  Note that for self-employment, the rate of growth is higher for future income at 1.n-1 as opposed to the slower pace of income increase at the job where we just used our initial salary in the equation and let it grow at a smaller growth factor.

Now simplifying the equation as we go…
(Initial self-employment income  +  ((future self-employment income ) ^ (1.n-1)) + discipline and drive + happiness of being self-employed  + current savings – tax implications) * chances of making it   > current salary)^ (1+0.0n))  + happiness at current job + retirement perks
(10 + ((future self-employment income) ^ (1+0.n)) +) * chances of making it)  + D&D + happiness + CS –TI > 50^(1+0.0n) + happiness + retirement perks
As we continue, we just assign more values…I know it Is hard to equate values to “happiness” or “discipline and drive”, as well as being realistic and putting a value for chances of making it.
Let’s say our potential future income is $100,000, let’s add this and retirement perks in which I would value at maybe $50,000 or 50 but by years so it will be denoted as such.  I would typically look at how successful you are compared to others in most fields and use that to sway the chances of making it in either direction from what is normal in your field.  Let’s say I do countless things at about a 50% rate better than others, and the success rate in my self-employment field is 30%...I would go ahead and do (0.3*1.5) = 45% or 0.45 as percentages are written as decimals.  I multiplied by 1.5 as that means I am doing it as 150% of my competitions level.  With this factored in, we can drop discipline and drive from our equation as it was factored in to this.  For tax implications, I am taking our full value and multiplying by 90%, giving an estimate of losing an extra 10% to the government each year with being self employed.  Note that this is not nearly always the case, and can vary drastically, so do your research on how you can set up your corporation for tax filings. 
Our updated equation becomes
(((10 + ((100) ^ (1.2n -1))) * 0.45) + 15) * 0.9 + happiness > 50 ^ (1+0.n) + 50 ^ (0.n) + happiness at current job
We can look at this by year to see where the equilibrium point with money and happiness is achieved
You can solve the equation by being a math nerd, or you can plug in numbers for trial and error as it would be the easiest method for most people.

Year 1: 
(((10 + ((100) ^ (0.2))) * 0.45) + 15) * 0.9) + happiness being self-employed > 50 ^ 1.1 + 50 ^ (0.1) + happiness at current job

And analyze from there on out to find at what year you breakeven and how comfortable you are with that.