5 Tips to Go from a Job to Self-Employment

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50% of the “secret” to a successful business is having a great idea, product, service or concept—one you can bring to the market profitably. That often takes time and staying power, and that’s where the other 50%—your finances–comes in.

You’ll need a certain amount of financial strength in order to weather the storms you’ll face in order to turn your business idea into a business success. Fortunately there are steps you can take in advance to get your finances ready for self-employment.

Managing the income transition

Self-employment is often viewed as a plunge—as in a deep dive into the unknown. Though there are certain benefits to giving 100% of your time and attention to your business, it isn’t usually necessary. If you can engineer the transition into smaller, more manageable steps (which we’ll cover in more detail in a future post) that will make the change less risky:

  1. Start with a full-time job and run the business as a part-time venture for as long as you need to—this will reduce the need for start-up capital and buy time to make mistakes.
  2. As your business income grows and you can clearly see how to expand it even more, reduce your job to less than full time. Even cutting from 40 hours to 32 could make a difference. A cost cutting employer might even welcome the suggestion—if not you might have to find one who will.
  3. When you reach the point that your business income is substantial but not quite a “living wage” you’re about to turn the corner to where your business is your primary income and a job is only a secondary source. A part-time job or a contract arrangement may cover the income shortfall while freeing up your time to expand your business.
  4. You’ve arrived. Your business has finally grown to the point that you’re making enough to pay your bills and there’s some left over for savings and some luxuries. You can say good-bye to jobs (full- and part-time) and contract assignments–but don’t burn your bridges behind you! You never know who you’re going to need and when!

Prepare your budget for self-employment

One of the reasons people stay on at jobs they don’t like is because of a steady paycheck. If you’re self-employed, you won’t have one! Self-employment income is business income and that tends to ebb and flow with the business cycles, the economy and even the seasons. Will you be ready for an income that looks more like a roller coater than a passenger train?

There are ways to prepare for the up and down nature of self-employment income:

  • Cut your living expenses down to the bone before beginning your business venture—the less you spend the less you’ll need and the more you’ll have to expand your business.
  • Get rid of any costly toys, expensive hobbies or memberships—you’ll have neither the time nor the money to carry them.
  • Lower your major expenses—housing and cars—as much as you’re able. Trade down if need be, but do what you can here. It’ll take a lot of cuts in small expenses to equal the impact of lowering just one of these.
  • Lower your lifestyle expectations for the job-to-self-employment transition period

Building a nest egg

If you don’t have an emergency fund, you’ll need to have one. A reserve equal to three months living expenses may be adequate while you still have a full time paycheck coming in. But six months will be the minimum for the day when you’ll say goodbye to your employer and go full throttle on your business.

How do you get a nest egg if you don’t already have one?

  • Start funding it with cash from the sale of some of the toys you sell to cut your budget.
  • If you start your business as a side venture, any money you earn from it (while you’re still working full time) should go into the emergency fund.
  • Eliminate retirement plan contributions and redirect the additional income into savings—short term liquidity will be more important than a retirement plan while your business is in an upstart status.
  • Even when you reach your emergency fund goal—or your business becomes self-sustaining—continue to save money! A fat bankroll is the best remedy to an up and down cash flow.

Getting control of your credit

One thing you absolutely don’t want to do is go into self-employment carrying a bunch of debt. It’ll be like burdening your new venture with old obligations. And while it may not be possible to wipe your credit slate completely clean, the more debt you can eliminate beforehand the better your chances of success as an entrepreneur.

  • Stop using credit from this point forward. Pay cash or don’t buy.
  • Start paying off your smallest debts, and payoff as many as you can.
  • If your car has a large payment on it, pay it off as soon as you’re able, or consider trading down to a beater paid with cash. If you have a home based business you probably don’t need anything more than a car that will get you from Point A to Point B.
  • We covered this under preparing your budget, but if your carrying an out-size house payment, trading down to less expensive quarters will open up a whole lot of options. A mortgage is, after all, the biggest debt payment most people have. I won’t beat this point to death since it’s a deeply personal decision for most people.

Health Insurance

If having a steady paycheck is the main reason people stay on at jobs they don’t like, having an employer sponsored health plan is probably not to far behind. Let’s face it, if you’re going to have your own business, you’re going to have to do something about health insurance coverage. It’ll be best to take steps to deal with it before going solo.

  • Start taking care of your health now and make it part of who you are—good health is the first, best kind of health insurance.
  • Look into catastrophic health insurance that will cover major expenses only. It can be substantially cheaper than full coverage, and if you’re healthy you probably don’t need more comprehensive coverage anyway.
  • Get a part time job that offers health insurance coverage. Many common employers do, including Starbucks, Barnes & Noble and Wal-Mart, as well as many banks, department stores and various government agencies.
  • If you plan on taking advantage of your employers COBRA coverage, it might be a good idea to lower the coverage level while you’re still employed, that way the cost of the plan will be lower when you leave. Generally speaking, COBRA will lock you into the level of coverage you select while you’re employed with the company.

Can you think of any other plans and preparations that might be needed to get ready to move from a job to self-employment?

If you’d like to start a business of your own, but don’t know which to go into, check out my post, The Freelance Blog Writer Side Hustle. Blog writing is a chance to start a business small and to grow it–risk free.

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8 Responses to 5 Tips to Go from a Job to Self-Employment

  1. Great post. I would also suggest creating a business plan and really seeing if the market may possibly be saturated with whatever it is you want to do. If your new career is outside the field you currently work in, network like crazy ahead of time so you already have a lot of connections.

    The ‘not burning your bridges’ point is a very good one. You never know when you may need to go back into the corporate world, so leaving in the ‘wrong way’ may really bite you if you are not careful.

  2. ET–The business plan idea is spot on. It’s the carpenters adage of “measure twice and cut once”. You need to know what it is you’re jumping into. It may not so much be saturation as the primary problem though (nearly every business out there today is saturated to some degree–we can thank the internet for that). What you may be looking for is whether or not you think you can bring something to the market that’s either unique or represents some sort of price advantage. If you can’t then saturation will doom your business from the start.

    On not burning your bridges, I think that these days we need to think of multiple income sources as nothing seems as secure as it might have been a generation ago. Even if you have a winning business at the moment, you never know when you might need an income supplement. Going back to what you were doing before you started your business is a natural place to go to find that supplement.

  3. I make a decent side income on the Web but I would never leave my current job because of the job stability. The Internet is full of its ups and downs; you can make money, but you are at the expense of an unregulated business where companies shave your earnings big time!

  4. Hi Sandra–There’s much to be said for having a full time job and a side business OR a full time business and a side job. Nothing is as stable as it used to be and by establishing multiple incomes we can come close to the job security of the “old days”.

    Also, even within the scope of a business it helps to have multiple revenues streams. On the web, as you say, it can have it’s ups and downs and this is especially true if you’re relying on a single revenue stream. It’s best to have three or more even within a business.

  5. You can’t overstress the health care part of your article enough. It’s the big bear to overcome when making that leap. Great tips!

  6. So true. Health insurance is one of the major reasons people are afraid to become self employed, and the concern is legitimate. You have to have some form of coverage in place before quitting a job with benefits, otherwise you can be wiped out from a single health event.

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