For your living expenses, take a brutal inventory of your spending over the past three months—or if you don’t have the paper trail to follow, keep track of your spending for the next three months. Note every single dollar and be sure to add in annual expenses that may not have occurred last quarter. Now add 10-15 percent to account for any emergencies that may arise while you’re starting your business. Finally, multiply the total by 2.5. Why 2.5? You want to give your business time to establish itself for two years and also give yourself a six-month cushion to find work should everything come crashing down.
To determine your projected business expenses, you must perform a detailed cash-flow analysis that assigns dollar amounts to every cost that goes into setting up and maintaining your new company—and then extend it out for two years. The last thing you want is to invest all your time, money, and effort to get a business off the ground only to close your doors a few months later.