After graduating from Wharton, I went without a paycheck for a year. After we closed our pre-seed round for my first startup, I started paying myself $2k / month.
The ‘broke entrepreneur’ phase of startups SUCKS!
Financial stress is painful as hell - it’s demoralizing to work incredibly hard and not see the fruits of your labors in a paycheck.
This post is about getting your financial health in order so that you can mitigate that stress, be more productive at work, and enjoy the journey a bit more.
Being Broke is NOT a Badge of Honor
All entrepreneurs know how painful the first phase of a startup journey can be.
We all experience a phase of being underpaid, and poor financial hygiene (both personally and in business) causes many founders to quit early.
Founders love to commiserate and share the hardship with others.
For many of us, it’s a badge of honor that we’re scrappy and resourceful.
Unfortunately, I’ve seen that pride and dedication work against us when it comes to personal finances!
Being broke should not be a mark of one’s dedication to a startup. It is a toxic mentality that leads to burnout!
Instead, we should find ways to extend our runway to stay in the fight!
The Psychology of Money
Money, sex, religion, and politics are not polite topics of conversation at a dinner party.
People have strange relationships with money for a myriad of reasons, but we all know that cash is security.
Having cash in the bank means that we can buy food, shelter, clothing, and provide for the people we love.
Basic human psychology is to ignore uncomfortable things. We almost never pause to consider our own mortality. When we fall off our workout regimen, we are reticent to think about the effects on our health.
Money is similar - it’s easy to think about money when we’re making enough of it, but extremely difficult to see the bank account drop month after month as we’re grinding away on building a new company.
I hope this post inspires some of you to reconsider your relationship with money and pay attention to it! I didn’t for too long, and I allowed money to be a source of stress because I ignored it.
The rest of this post is going to be tactical advice for building financial health, but before we push on, I wanted to recommend two fantastic books -
The Psychology of Money by Morgan Housel is a terrific read. The book explores why we struggle to think about finance and common misconceptions about finance and money.
The human mind has trouble intuiting things like exponential growth and compounding interest. Our psychology and how we were raised dramatically impact our relationship with money.
You Are a Badass at Making Money by Jen Sincero is a delightful read. It’s written in a very approachable manner - it’s full of funny anecdotes.
The book encourages us to think about the value we create and bring to others. I found it very helpful in reducing the guilt I feel when I ask folks to pay for my services.
It’s a huge unlock!
Building & Measuring Runway
In a startup, ‘runway’ refers to how long the business can continue to operate without additional revenue.
Runway is a critical metric impacting fundraising timelines for venture-backed startups that typically operate with losses during their growth.
Keeping track of personal runway is very helpful for early-stage founders as well! Since our paychecks may be sporadic and unpredictable, it’s helpful to know how far our cash balance will take us.
How do you measure personal runway?
An old budgeting method from the early 1900s is intuitive and remarkably useful. It’s called the envelope method.
The Envelope Method
Picture this - you’ve just been paid in cash for the last two weeks of your work.
You have various monthly expenses - rent, food, transportation, etc. It’s hard to keep track of all upcoming bills in your head.
The envelope method of personal finance is when you take the cash you receive and break it into categories. Back in the day, people used to take the cash they had earned at work and allocate it across envelopes that are marked ‘Rent’ or ‘Food’. In doing so, they were never caught flat footed - rather they could only spend what was in each envelope.
In the digital age, there is a way to do this as well!
You Need a Budget
One of my favorite personal finance apps/tools for founders is You Need a Budget, or YNAB.
YNAB relies on the envelope method of budgeting - you take all of the cash in your accounts and allocate it across categories in a budget over time.
This method is extremely helpful when cashflows are unpredictable.
By allocating your cash across categories in the current month and future months, you’ll see exactly how far your current cash balance will take you. It allows you to see your runway and adjust expenses to extend it.
I used YNAB for years at Wharton, but fell out of the habit during my first year as a founder.
I recently got back into the habit of budgeting and returned to YNAB. Although I like their system and software, I’ve found another app I like better when cashflows are more consistent (ie when you have a steady paycheck) -
Monarch Money
Monarch is a fairly new company that has had a tremendous year since Mint shut down.
Monarch uses a similar budgeting method as YNAB—you create a budget by category—food, rent, medical, etc.
There are a few differences with Monarch Money -
You can plan for future cashflows. Monarch is a lot more helpful when you have predictable income, because you can plan for how much you’ll save in each month.
In my opinion, the user interface is much better.
The analytics and reporting is amazing.
You can set goals and automatically track progress.
Here’s a screenshot of the software’s analytics features -
Tracking cashflows by category is powerful and fun!
Sankey diagrams are cool, and it’s easy/intuitive to see where your money goes!
You can sign up for Monarch Money here (note: I love the app and use it all the time now - this link is an affiliate link!)
Closing Thoughts
I fell out of the habit of budgeting when the pain of seeing my bank account go down became overwhelming.
If there’s one thing I’ve learned from being a founder, it’s that problems do not go away if you ignore them!
Having an understanding of how far our money will go and goals to work towards makes us hungrier to grow our business.
I hope you enjoyed this week’s edition of Retained Learnings!
I wish I had paid attention to my finances when I first started on this journey, but it’s better late than never!
Best,
Brendan