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:
- 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.
- 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.
- 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.
- 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.
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.