I ruffled a few feathers with my recent post The Software Product Myth. The unrest surrounded my statement that making $2500/month from your software product wouldn’t allow you to quit your day job.
The comments here and on a few social bookmarking sites mentioned that you could quit your day job if you wanted to, and that you could live on $2500/month just fine in many cities in the world (although in my hypothetical situation I was speaking about a developer based in the hypothetical U.S.).
We could get into a discussion about how much developers make, and how many costs you will take on by quitting your day job, but it’s completely irrelevant.
The point of The Software Product Myth is that at some point you are going to have too few sales to support yourself monetarily, yet too much work to fit comfortably into your evenings and weekends. Whether your number is $1000/month, $1500/month, or $5000/month has zero bearing on that point…what matters is that building a product is a lot more difficult than most people make it out to be.
With that said, one of the helpful points that came out of the discussion is how many expenses you encounter when starting a company that you never knew existed.
Remember that line item on your paycheck that said something about retirement matching?
Or the disability insurance your company offers that you never knew they paid for?
Yeah, those are going to hurt.
You can go without these expenses for a short time while in startup mode, but if you plan to build a company that’s sustainable in the long-run you’re going to need to cover these expenses before you think about collecting a salary.
In putting together this list I looked through some of my old posts and also scanned my recent bank and credit card statements. I’m amazed at how many business costs I pay throughout the course of a year.
Depending on your country of residency these may not apply to you (people with national health care – consider yourself lucky!), but most of them apply in one form or another throughout the world. In addition, it is unlikely you will need every one of these expenses, but the intent is to be as close to an all-encompassing list as possible.
Core Business Expenses
- Business Filing Fees – This includes your business license, fictitious name statement, and reseller license fees (if applicable). They tend be paid annually and vary widely, but for a sole proprietorship (in the U.S.) you’re looking at around $100/year. L.L.C.s and Corporations range from a few hundred dollars into the thousands.
- Accountant – Business taxes, especially if you have a home office, are easy to get wrong. As I said in The Five Minute Guide to Becoming a Freelance Software Developer, an accountant is not an optional expense. Costs range from $300-$1000 per year.
- Lawyer – Lawyers I’ve worked with run $150/hour and up. If you want contracts that will hold up in court you’re going to drop serious coin with our friends in the legal profession.
- Liability/ E & O Insurance – Varies widely, typically from $1500-$2500/year.
- Health Insurance – In the U.S., decent insurance for a family of four is now hovering around $1,000/month (less if you’re single). Plans are also limited until you have a small team and can get a decent insurance plan through your payroll software.
- Disability Insurance – It varies, but typically runs $250-500/month in the U.S. You may think this is optional, but consider that during any given year you are 4x more likely to become disabled than to die.
- Life Insurance – While you probably don’t need it if you don’t have a family, it’s a good idea to have if you’re married (and I would argue a requirement if you have children). If you’re young and go with term life insurance you’ll pay $10-20/month, but as you age that will increase dramatically into the hundreds.
- The “Employer” portion of Social Security (FICA) and Medicare – Often called the “self-employment tax,” it eats up an additional 7.65% of your gross income if you’re self-employed (since your employer usually picks up this portion).
- Retirement – Save for a rainy day. No one’s matching your 401(k) anymore, and you should be putting away at least 10% of what you make.
A few of these apply only to companies that build software, but most apply across the board.
- Issue Tracking – You can go open source and save money, but you may lose it eventually in the time you spend maintaining and upgrading it. I’ve always used SaaS issue trackers like FogBugz or Github issues.
- Advertising – This will vary widely, but a decent Adwords budget will run $100-600/month (though it should be paying for itself).
- Graphic Design – Here’s another danger zone where developers cost themselves money by trying to design their own graphics. Please, I beg you, pay someone to design your web site.
- Phone – $50-100/month for your mobile.
- Internet – $20-120/month depending on speed.
- Fax Service or Fax Machine – It seems like it should be brought into the back yard and shot, but I still send a couple faxes each month. eFax will run you $14/month (annual plan) or if you have a land line you can fork over $50 for a fax machine (or buy a multi-function printer).
- Printer – A color laser will run you $200-400 these days. If you’re fine going old-school you can get a B&W laser for around $80. Either way, the toner is what kills you. Set aside $50-150/year for toner and paper.
- Computer – If you’re writing software you’re probably upgrading your PC every 2-3 years. Figure $1,500 for a new laptop, $700 for a desktop, give or take a few hundred.
- Software – If you’re one of those smart Ruby or PHP developers then most of your tools are free. If you work with .NET be prepared to pay $1000-2000 for an MSDN subscription.
Based on the above, you can probably see how $2500/month isn’t going to keep you in the lifestyle you’re accustomed to…it’ll barely keep the doors open.