The Pocket Cyclone

Alex Okafor did a great post about managing your financial burn rate as part of his idevblogaday.com contribution.

This is a really good discussion to have. I found that in the iPhone Indie Business it is no different than with any other business: You rarely talk about money, although it is the big underlying topic and ultimately defines each Indie’s ability to live this life. Let me share a few things I learnt.

1. Money is not a bad thing
So stop treating it like that. Don’t be shy. Talk about it. We all have the same challenge here. Accept that it is a substantial component of what makes an Indie exactly that: independent.
The (democratic) societies most of us live in give us ultimate freedom to go Indie. Run a small business from wherever we want and how we want. The biggest thing that stands between you and this ultimate freedom are indeed your finances. There. I said it. I know it is unromantic and cold, materialistic, but let’s face the truth. We are out to make enough money to support our independence, we do aspire financial freedom and that’s not a bad thing. But that acceptance has consequences.

2. Learn
So you spent years to teach yourself how to write code. You spent a long time creating your app(s). You start to make some money with those and mastered your budgeting, so something is left over at the end of the month and you put it… drumroll… into your savings account!? Because there it is, hmm, “save”, right? And you have better things to do.
Doesn’t this sound strange to you? Shouldn’t this hard-earned money deserve a bit more than that?

One of the biggest lessons in my life was that my financial education practically was non-existent. That came closely together with realizing how much pressure many advisors out there really have from their firms/banks and how much that can cost over time.
You are on your own! I learnt this, slowly, painfully, after years of thinking I didn’t have enough to “invest” anyway, so why bother.
And you know what, that was WAY too late. I learnt a lot about that stuff but I wish I had started way earlier, it would have made a big difference in my life. My strong recommendation is to make financial education the number two priority when going independent, right after mastering your business.

3. Mastering financials = budgeting + investing
3.1 Budgeting
Alex talked about budgeting already. It is really very simple. More needs to come in than go out. And yet, isn’t it amazing how few people really understand that? However real budgeting has some tricky aspects, like how to treat your house, which is a real biggie. For example, I generally believe that a house you live in is NOT an asset but a liability, and while everybody is entitled to his own opinion, what I really want to say: If you buy a house, you should be able to HAVE that discussion in an educated way. See 2.
Alex was not happy with the electronic budgeting solutions he tried and I have to say: I don’t use those either. What I do is to create a rough spending plan and then track my (families) exact spending using Quicken (or Mint) at the end of every month and see where we are off. Do that over a few months and you develop a pretty good idea where you stand. The hardest thing: Don’t lie to yourself. Capture everything. You will be surprised how much money you spend!
And while I strongly support tightening the belt in certain life phases, for me this has more a signal effect than a real effect (and yes, this is a very important signal and I am NOT saying to not do that). What I learnt (and what statistics support) is that skipping Starbucks is a nice idea, but don’t lose sight of the big things that really affect your financial situation. The house you think you deserve, the unexpected car repair, the “I really deserve that new Mac” spontaneous splurge, the college saving fund contribution, the once-a-year payments, those are the most dangerous things to threaten your financial plan and you have to get a handle on those.

3.2 Investing
“Haha, you are funny. If I had something to invest, I would not do <insert strange argument here>.”
If you don’t have anything to invest, go back to 3.1. Seriously. And if you temporarily decide to live from your savings and exceed your monthly budget to support a career change, fine. That only means that you have savings to manage. NOTHING unties you from the responsibility to learn about investing at any time. If your app suddenly breaks through or your budgeting efforts are good enough to show a positive month-end, it is too late.
I strongly believe that learning how to invest money is a lifetime task and it is mainly about building up experience. It is about understanding the concept of diversification and the different investment strategies. It is about being able to filter and qualify a huge flow of opinionated advise. Trusting advisors? Why not. I’m working with advisors and every day I feel I need to learn more myself to judge and to qualify their work.
If you are an independent app developer, one thing you know is that our income is never steady. You have to learn how to deal with that. And if there is a big upside, that’s where it starts to get interesting. Because one investment strategy that you have but nobody else in this world is to invest back into your own business. Hire another programmer? Or an assistant? If you have a strong handle on your financials, that will only help you to make a good decision.

4. Sounds good. But how does that look like?

• I do a detailed expense analysis every 1-2 months and compare it against the budget I created
• this total monthly number goes into a lifetime planning sheet that I do with Excel, where I track everything, on a high level. It basically says: If our expenses develop like this and our income/my app business develops like that, then at age xyz our financial situation looks like that. Right now, as long as my business doesn’t over-perform, I adjust this lifetime plan almost every two weeks with updated numbers. It tells me exactly when I will need to start taking on project based jobs and when I have to give up the Indie Dream and become employee again*
• I have a “play” brokerage account, where I have a small amount of money set aside to invest directly into the stock market. Trying to beat the market as a personal challenge I found this to be highly educational. Right now it is iced as my focus is 100% on my new business, but I will get back to that as soon as I see some relief on the business side. This is a good example of where I draw the line, the other stuff I do even in the hottest startup phase
• I spend 2-4h every week on education, reading Money magazine, tracking the stock market and trying to understand some more of the things that are going on there.
• every two months I talk with my bank advisor about his strategy with my savings, although I track almost daily online what they are doing

* with my first startup, I had a loosely maintained “if we don’t get any new income, in how many months will we run out of money” sheet. Whenever I talk to other entrepreneurs I found they had something similar, I call it the “when will we be dead” plan. Now that I went Indie with family/house (aka liabilities) I prefer a more detailed plan that includes my personal situation.

5. Books
There are two great books I would like to point to, both really helped me on my way.
“Rich Dad, Poor Dad” is a loud, at times sensational book. But if you read it closely though, it really talks about essential things: You HAVE to track your spending so you KNOW what you spend. Take your destiny in your own hand, you might be the best investment that is out there (this is what every Indie dev already does right now). And you have to learn financial stuff, all your life. It was eye-opening and really helpful to me that someone finally said that loud and clear. Most of what I wrote above is echoing this book.
The other book that really substantiated the whole thing for me was “The Millionaire next Door”. This really is a statistics book that explains the in/out rule in great detail. From the title I thought it is just another “get rich” book (and I hate those) but it is a really good read about the difference of unsuccessfully vs. successfully managing your financial situation (which means exactly the deliberate, informed frugal lifestyle that Alex described).

Let me know if you think a passage in this long post is not clear, if you disagree or if you have questions.