Discover more from Falling to Systems
Just got laid off? Figure out your runway ASAP.
Desperation can be measured in months
Oh, no. A calendar invite for a meeting in less than an hour just came in from my boss. The feeling of looking over a cliff swells in my stomach because I know exactly what’s about to happen. I’m going to lose my job. Again.
Despite successfully scaling teams and regularly hitting ambitious targets as a senior manager for multiple high growth startups, I still managed to get laid off four times in a row over the past seven years. In each case, the cause was never tied to personal performance. It always came down to the company losing their largest accounts, executive leadership turning over, or huge market downturns.
While never my intention, I’ve had to get good at living life between jobs. Oscillating between feast and famine over that past several years has taught me one inalienable truth:
Financial desperation is precisely described by the length of your runway.
Thanks for reading Falling to Systems! Subscribe for free to receive new posts and support my work.
How to calculate your runway
Note: I’ve created a companion spreadsheet to this post to that will automatically calculate your runway. Please note it includes steps that differ from those below.
Your runway is the number of months you can continue living your existing lifestyle, given your current income and savings, without adding to your debt.
Step 1) Gather your ingredients
In order to determine a runway figure you are confident about, you need to determine three key numbers:
Monthly Spending Average (MSA)
Pull up your last twelve monthly bank statements, find each month’s total spending amount, add them all up and divide the total by 12. This figure is your Monthly Spending Average or MSA. If you pay for things from multiple bank accounts, your MSA will be the sum of each account-specific MSA.
Your MSA is your truth. Every aspect of how you live your life is priced into this single figure. It’s inclusive of every bank withdrawal and credit card and loan payment. It represents every restaurant meal, last-minute splurge, plane ticket, vacation, streaming subscription, emergency room visit, trip to the grocery store, car repair, gift for a friend, insurance deductible, road trip, bus fare, etc. It’s a literal reflection of everything you’ve spent money on over the past 12 months.
The sum of all monthly regular deposits into your bank account. If you’re single and just lost your job, this number is likely $0 or whatever you can get from unemployment insurance in your state. If you share finances with a partner, that person’s paychecks would factor into your Monthly Income figure. Similarly, if you have tenants that pay you rent, or you have some other kind of consistent passive income, then that money is also included in your Monthly Income figure.
This is the amount of savings you have available in cash or an easily sold stock portfolio. It does not include retirement funds, CDs, equity in your home, life insurance policies, the value of your car, or anything else that can't be turned into cash in hand within a day or so.
Step 2) Determine your Monthly Cash Flow (MCF)
This is the money that either enters or leaves your bank account over the course of a month. In the case of a layoff, the loss of your regular monthly income will likely turn your MCF from a positive number into a negative number.
MCF = Monthly Income - MSA
If your MCF is still positive even after losing your job, then you can stop here. Congratulations, your runway is infinite.
Step 3) Calculate your runway
Your runway is simply the number of months your liquid savings can sustain your negative monthly cash flow.
Runway = Liquid Savings ÷ MCF
Interpreting your runway
Once you’ve determined your runway, it’s time to make sense of it. Here are some benchmarks to consider.
If you have fewer than three months of runway, then your back’s against the wall. You'd best apply to jobs as intensely as possible, and take the first job offer that covers your MSA. No judgment, and under the circumstances, it's the wisest choice you can make.
You've got a little breathing room, but not much. I've been through enough job hunts to know that it can easily take 4 months to get a job offer, and another month beyond that before your first paycheck arrives. You might have a month or so of faffing about, but after that, it's time to get to work.
You get to be picky about your next employer and can turn down a job offer if it comes early in the game. I've had lots of fun getting a few job offers in hand and playing one employer off another to maximize my leverage heading into a salary negotiation.
You're fully in control. Runways of this length allow for sabbaticals, trips around the world, taking "fun" jobs for a period of time, and the like.
Understanding your runway
Just like we can break down our diet into macros of carbohydrates, fat, and protein, you can break down down your MSA into the following expense “macros”:
This is your current monthly rent or mortgage payment.
Any payment that cannot be changed through adjustments in your behavior. These include debt payments, health insurance premiums, childcare and alimony. Very few payments are actually considered obligations. Even utilities don't make the cut since their payments can be adjusted by changing your consumption patterns.
This one's easy. Lifestyle = MSA - Housing - Monthly Obligations.
It's often surprising to see how high your Lifestyle expense actually is when you back into it from your MSA. Taking this top down approach is, by definition, 100% inclusive and brutally honest.
The mistake I often see (and have made myself) is trying to approximate your Lifestyle expense in a bottoms up fashion. The moment you try to think up all the ways you spend your money on a monthly basis, you'll inevitably either miss something or make an unrealistically optimistic estimate about how you’ll behave in the future. It’s a sure fire way to underestimate reality.
Extending your runway
Breaking down your MSA into its macros reveals the levers available to lengthen your runway.
Adjust your housing
For most of us, housing is our largest single expense. If you live in an apartment with high rent and your lease is about to expire, you can determine exactly how many months of additional runway a lower monthly rent will give you. If you have a sizable mortgage, you could consider taking in a roommate. If moving back in with parents or a family member is an option, few options will extend your runway further than reducing your housing expense to at or near $0.
Adjust your lifestyle
This is harder than it looks because a significant portion of the expenses that fall into this category are infrequent or unexpected. Sure, you could choose to eat out less often, or go to the cheaper grocery store, but when your car breaks down or you break a tooth, you’re going to have to cough up the cash.
If your MSA includes large purchases or expensive vacations over the prior 12 months, you can re-work a target MSA that strips out those specific extravagances, then see how that new leaner MSA translates into additional runway months. You can also elect to reduce optional indulgences like streaming services, daily runs to Starbucks, buying new clothes, and the like. While each expense itself may not move the needle much, a bunch taken together could buy you a few extra months.
Unfortunately, as the name implies, there’s very little to be done with expenses in this category. If you have student loans, you might qualify for temporary relief through a forbearance or deferment. From a planning perspective, it’s best to treat these costs as set in stone.
I've been at both ends of the spectrum
My runway after my first layoff in 2015 was about two months. I knew my scant reserves wouldn't last long and I ended up taking the first job offer that came my way. While that decision stopped the bleeding in the short term, the role itself amounted to nearly two years in sales that weren't enjoyable and did relatively little for my career. This experience taught me that a short runway can force you to take a less than desirable option leading to lasting consequences.
Luckily, I’ve been able to avoid re-learning that tough lesson in the intervening years. My most recent layoff came in June of 2022, and the runway I had by that point was well in excess of two years. The freedom and lack of stress associated with this runway allowed me to take a proper sabbatical, which I used to enroll in Write of Passage, David Perell's phenomenal cohort-based writing course. That experience gave me exposure to a network of like-minded aspiring writers and creators, and allowed me set my sights toward sharing my hard earned experience and skillset with you, my dear reader, through this very newsletter.
None of that would have been possible with a short runway.
The best time a build your runway is when you don’t need it
Even though layoffs are something you have no control over, it's empowering to see just how much you can insulate and protect yourself for the next rainy day. If you're reading this as someone who just lost their job, the best and first thing you should do is get real about your runway and proceed accordingly.
My last layoff has turned out to be a transformative experience that has already set me on a new and far more fulfilling course that anything I could have imagined the day I received that fateful calendar invite. Luckily for you, you don't have to rack up the layoffs as I have to learn from my mistakes.
If you have a job, then the best favor you can do for yourself is to build a war chest of savings big enough to cover a 12+ month runway. If and when the day comes where the rug is pulled out from under you, as it was for 158,000 highly paid workers in the tech sector in 2022, then you'll be coming at it from a position of strength, tranquility, and even excitement. Just do a little math, set some smart savings goals, and work toward peace of mind.
Thanks for reading Falling to Systems! Subscribe for free to receive new posts and support my work.