If you are serious about working for yourself there are several actions you have to take so you have the best chance of succeeding in your business. One of those is financially preparing for self employment. Today I discuss the steps I’m taking after doing a great amount of research.
Financially Preparing For Self Employment: Pay Off Debt
Debt is a yoke. It is an anchor holding us down. Thus, you spend more time and energy on how to deal with debt than on other tasks which could improve your business venture. So you must make a plan now to pay off all your debt, outside of your mortgage, before you go into self-employment. The reason I omit your mortgage from a debt payoff plan because most mortgages are quite large and it would take a long time, probably years, to pay that off.
I started my debt payoff play years ago, and I achieved that goal in July 2019. So I’ve been debt-free for nearly a year now. As a result of that, I’ve flourished! I don’t have the stress of keeping my job so I can pay my debts. Or having to work longer and harder to make enough money to repay those debts. I’m not only happier but I’m free!
With the Debt-Snowball Method, you pay off your smallest debt first while paying the minimum payments for your other debts. Once you pay off the smallest balance, then you pay off the next smallest debt with the additional money you have after paying off the old creditor. The pro of this method is that you see results fast by paying off small debts. However, you will pay more interest over time which is a con.
Regarding the Debt-Avalanche Method, you pay off the debt with the highest interest rate first. Thus, you save money by not paying more interest. However, this method may take longer for you to get out of debt if the debt with the highest interest rate has a large balance.
Whatever method you choose is up to you. I chose the Debt-Snowball method because I wanted to rid myself of the smallest debts first.
Finally, the main reason to get out of debt before going into business is so you don’t rush to make your business profitable. With little to no debt, you will have less expenses to pay. Most startups or new businesses are not profitable within the first year. Actually, it takes about 2 to 3 years for most new businesses to make a profit. Even if your business is profitable quickly, you can reinvest those profits into the business to grow it bigger than servicing your debts.
Financially Preparing For Self Employment: Live On A Lean Personal Budget
Some new self-employed individuals continue living on their “employee” personal budget which is wrong. This is wrong because you don’t have a paycheck coming in on a schedule. As an self-employed individual, it can take weeks to months to get paid, depending on your service or industry. So it’s good to live on a leaner personal budget now to get used to it.
Now this is a hard practice to implement. I myself have tried twice before and gave up. However, as of this post’s publication date, I am living under a budget so I don’t overspend on groceries or gadgets or even treats.
It’s important to live leaner now than later so not only do you get used to it, but you can determine the proper personal budget. It takes time to understand how you or you and your family handles living on less money. Maybe you need to allocate more funds to groceries but decrease your entertainment budget. You won’t know until you try.
Finally, Estimate Your Burn Rate
Before you start working for yourself, you need to estimate how much your burn rate will be.
The burn rate is typically used to describe the rate at which a new company is spending its venture capital to finance overhead before generating positive cash flow from operations. It is a measure of negative cash flow.investopedia,com
Thus, if you are using your savings or borrowing money to operate your company you will have an idea how long that money will last. This is also consider your runway. The less runway you have, the faster you must push the airplane so it can fly and not crash. It’s best to have the longest runway possible, just in case something goes wrong.
I have run several estimates on my burn rate. In those calculations I include not only my business expenses, but my personal expenses too. I’m using my savings as a guide. Since I will work on my own, and I’m going to setup my business as a Sole Proprietor, I can run the figures this way. However, if you are going to have employees in a LLC or Corporation, then you need to separate your personal and business burn rates.
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