Technology has brought gigantic changes to the world in the past decade. Now it’s easier than ever to branch out on your own and find a way to make a living that coincides with the specific skill set you have. It’s pretty amazing that you can create your own job.
With that said there’s still no magic button you can push for success.
Self-employment comes with its own set of problems. A little bit of preparation and awareness as to what you’re up against when you go it alone can greatly increase your chances for success.
These are the four financial preparations you should make before self-employment.
Build an Emergency Fund
In the beginning self-employment can bring a lot of uncertainty. Especially if you’re used to receiving a steady paycheck.
Even though you might read about others who are bringing in massive amounts and can make one month’s income stretch for six months, that’s not the case for the vast majority. When you’re self-employed you’re going to be working with irregular income that will fluctuate from month to month.
You need to be prepared for any problems that will come up. You’ll be so much less stressed if you build an emergency fund before taking the leap into full time self-employment. Save at least a few months’ worth of expenses.
Get Your Expenses Under Control
Aside from having an emergency fund the other crucial component that allowed me to confidently go full time was keeping my expenses low. The more room you have in your budget when starting out the better off you’ll be.
(Unless you’re starting out with a full client roster then you might be okay!)
While you’re building up your business on the side start working on lowering your expenses, paying down your debt and living on a reasonable budget.
Build Up Your Income BEFORE Quitting Your Day Job
While it can be exhausting working a day job, coming home and then working on a side business it’s something you NEED to do.
If you quit your job and expect that you’re going to magically find steady work and that you’re going to love it, you’ll be highly disappointed.
You need to start playing around with ideas while you still have steady income coming in. I tried and failed at several different ideas before discovering one that worked.
It’s going to take hard work and time to really know if you have a business idea that’s strong enough to support you.
Understand Self-Employment Taxes + Other Expenses
When you’re self-employed you’re suddenly responsible for all kinds of expenses that may have once been paid by your employer.
You’ll be responsible for:
These three things can add up to a huge chunk of income!
For instance as a self-employed person you’re now responsible for Social Security and Medicare tax that was once paid by your employer. Instead of paying the normal 7.65% that was taken out of your paycheck you’ll also be paying the portion employers pay making your new bill 15.3%. Add to that another 10-20% in federal income taxes and you’re handing over an easy 30% of your income to the tax man.
If you currently receive employer sponsored health insurance you need to calculate how much it’s going to cost you to purchase on your own.
Thinking of the things like taxes, insurance, and retirement can help you determine what you’ll actually need to earn to make self-employment work. (Hint: you’re going to need to earn more than you do from your day job with benefits.)
Being Prepared Will Increase Your Chances of Success
If you’re just getting started with freelancing or entrepreneurship it’s tempting to want to throw in the towel when it comes to the 9-5 but it’s not a good idea. Set yourself up for success from the beginning.
There will never be the “perfect” time to make the leap but preparing in advance and knowing what you’re up against will definitely help you beat the odds!
Photo Credit: (c) Can Stock Photo