Simple Steps to Build Up Your Financial Runway

All about leveraging a financial runway to go full time in your side hustle and how to get there faster with house hacking

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I was chatting with a friend of mine the other day who has built an incredible side hustle and is ramping up to quit her full time job and run her side hustle full time.

This is a really incredible opportunity for her and I was thinking through some ways that she could make it possible sooner.

The details:

She has a home that she lives in that she must pay the mortgage and taxes on every month. The home is on the older side and often needs frequent maintenance. She wants to rent it out potentially when she goes full time with her business but is worried about the maintenance and has never been a landlord. She also really eager to travel and work remotely as her side hustle is a virtual business.

What would I do?

Build a financial runway. As an entrepreneur you depend solely on yourself and your clients for income. It is an extreme balancing act and can be quite difficult at times depending on the economy and sometimes factors outside of your control.

For this reason I would create a financial runway of capital to rely on in times of emergency. I would build up to a one year’s worth of income or expenses in an emergency saving account. This money should not be pulled from unless there is an emergency. Day to day costs should come form the income generated form work activities.

How would I go about building up this runway?

SAVE. Big time. In this situation my friend has two income streams, her full time w2 job and her side hustle. I would put all income coming from my full time job towards my savings and I would start trying to live off of ONLY the income generated from my side hustle.

This does two things:

1. It forces savings and builds up the one year financial runway

2. It also forces you to live on the income stream you will be dependent on once you quit your full time job. This is important because you will be able to determine whether this side hustle is sustainable as a business/full time job. If the side hustle income doesn’t cover the expenses then you will need to find a way to either scale it, cut your spending or recognize that maybe the side hustle won’t be sustainable long term.

What about the house?

Going back to her situation she has this big house payment hanging over her head that is also preventing her from building up her financial runway. She has a few options that she can pursue:

1. Rent out the house to long term roommates to cover the housing expenses.

2. Rent out a room in the house to a travel nurse on furnished finder.

3. Do nothing, minimize expenses as much as possible and continue to build up the financial runway

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   I would opt for option 1 or 2. This is really easy for me to say because I already am utilizing this option. I rent out rooms in my house and my basement to full time tenants. It is definitely not for the faint of heart.

   What I suggest to those who are not enthusiastic about this idea, I would select option 2 and rent out a room in my house to travel nurses through furnished finder. These individuals usually have a large stipend from work that covers their housing costs and therefore can afford to pay rent. Because it is a furnished room and a short term lease, you can charge a lot more than a typical lease. Sometimes their workplace pays you directly. They are also working all the time so you never see them. As a short term roommates, they pick up and move by the time they start to annoy you.

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What happens to the house when she goes full time as an entrepreneur?

1. Continue to rent out the house to roommates or tenants

2. Continue to rent out rooms to travel nurses on furnished finder and move elsewhere

3. Use the equity in the house to either cash out refinance and buy something else or take out a HELOC

4. Sell the house.

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   If I were in her situation I would likely rent out the house to full time tenants and as a Single Family house it would be their responsibility to manage the lawn care and snow removal. To lessen the burden on herself she can also put together a list of home care professionals and when issues arise give the tenant the responsibility of handling the issue (i.e. calling the plumber when the toilet is clogged or calling an exterminator when there are bugs). Hiring a property manager will also take the burden off of her but will decrease her income from the property.

   I like this option for a couple of reasons. It allows her to keep the house and utilize the equity like in a cash out refinance or potentially through a HELOC (Home Equity Line of Credit). She can then use that money to either buy something else like a tiny home for instance. I also think having a HELOC is a great option for use as an emergency savings. Essentially it is money that is always available as long as you continue to pay it off. I also like this option because she will continue to have this other income stream from her rental property. Diversity of income is HUGE and this will likely give her a little bit more cushion and flexibility when she commits to entrepreneurship full time.

   The final option of selling may also be the answer she is looking for. If she really doesn’t want the burden of owning the home and tenants she can sell the house and use the equity or profit to purchase something else or even to build up her financial runway.

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What else can we learn from her situation?

I think there is a lot to take away from this situation no matter your own circumstance.

1. Having an emergency savings is always important even if you are not going full time as an entrepreneur. A financial runway = emergency savings.

2. Multiple income streams creates flexibility.

3. Owning a home should not limit you.

4. There may be opportunity for non-homeowners to create additional income or cover costs. If you are renting an apartment and your lease permits sublets then you can rent out your room or another room in your apartment to someone else (i.e. short term tenant, airbnb or long term tenant).

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If you were in her situation what would you do? Let me know in the comments. And don’t forget to SUBSCRIBE!

Until next time,

Amanda

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Please note: I am not a financial planner/advisor etc., my newsletter is for entertainment purposes only. Please consult a professional financial advisor, lawyer, or CPA before taking any action. Thank you.