You’ve come to the decision that your 9-to-5 job isn’t cutting it anymore. Maybe you’re feeling burned out from your current employer, or you’ve realized that you are no longer passionate about your current profession. Is your side gig starting to really take off and you want to devote all your energy to it?
No matter what your reason, making the switch to self-employment is a big leap.
Emotionally, you’re likely feeling a lot. You’re excited about working for yourself and putting your time into something you really love. But you’re also likely a bit worried about how your day will be structured now that you aren’t tied to a company. You might also be thinking about how this move will actually pay off so that you can live the life you want.
Whether you've been self employed for awhile or moving from regular, full-time employment to self-employment, the transition shouldn’t be taken lightly. You want to prepare as much as you can before you dive headfirst into your new entrepreneurial life. From a financial perspective, there are things you can do to help lessen the burden and financial risk. Ready to learn more? Keep reading to discover four tips to navigate the transition from employee to self-employed without compromising your finances.
1. Save up
As you’re looking to prepare financially for self-employment, you want to consider your current money situation. If you’re already penny pinching, now may not be the most opportune time to give up your consistent paycheck. Alternatively, if you are spending frivolously, you probably want to reign it in and start budgeting. Ideally, you should have enough money in the bank to stay afloat for three to six months. This means if you made absolutely zero dollars at the end of six months, your current lifestyle wouldn’t have to change.
As you're planning out how much money you should have in reserves, consider inflation rates and emergency situations. You can’t predict how the economy will fare in the next six months, and you can’t completely avoid something happening beyond your control. Saving up may mean that you have to put in more hours at your current job before handing in your notice. Rushing into something that you aren’t prepared for can be problematic before you even get off the ground.
2. Lower your monthly expenses
Dinners out, international trips, and shopping sprees are all fun, but if you’re looking toward self-employment, you may need to put a pause on some of these expenditures. Lowering your monthly expenses means taking a look at what you’re currently spending. Give yourself some time to look back at your last three or four months of bills. Separate the fixed expenses such as ent or mortgage payments from nice-to-have weekend getaways, for example.
Once you’ve bucketed your expenses, add up your fixed expenses. This is the bare minimum of what you can expect to pay over the next few months. While this doesn’t mean you need to become a hermit and stop spending money on anything else, it will take some discipline. Be open with your friends and family members about your current budget, and suggest activities that won’t put a strain on your wallet. Instead of going out to dinner and a movie, host a night in and watch something on television. You get the idea.
3. Pay off credit card debt
About 35% of Americans carry credit card debt from one month to the next. If you're similar to about one-third of our population, then listen up. Paying off your credit card debt is a step toward financial freedom and kickstarting your entrepreneurial dreams. Having too much debt can hurt your credit score, which will make it harder for you to set up your own business. Getting a business loan will be harder since creditors would be taking on more financial risk.
Paying off your debt won’t happen overnight, so make sure you have a repayment strategy in place. Take note of how much you owe and on which cards. Call the credit card companies and ask for lower interest rates—you’ll never know what they say until you ask! Then figure out how much more you need to pay each month to eliminate the debt. Stick with your plan, and avoid overspending by using either a debit card or good old cash for the time being.
4. Understand business-related purchases
Getting a small business off the ground is a financial burden from the start. There are one-time purchases you’ll have to make, as well as new items you’ll need to buy on a regular basis. Before you swipe your credit card for a business-related purchase, be sure you understand what can be considered "expenses." Many costs can be deducted as business expenses, lessening your tax bill.
An allowable expense is anything that is solely used for your business. Some examples include office supplies, internet charges, mobile phones, and marketing costs. If you're using QuickBooks Online to track expenses, remember to separate business expenses from personal expenses. And how these expenses fall into your tax return from the start is crucial. Consult with your accountant or bookkeeper.
Takeaways
If you’re thinking about the possibility of running your own business, make sure to plan ahead. Be up front with yourself about your finances. Map out what it will take to become self-employed without spiraling into debt. Taking this time now may be the difference between being a thriving or struggling entrepreneur.
Editor's note: If you do not have an accountant or bookkeeper, you can find one at Find-a-ProAdvisor.
