Taking the plunge into full-time self employment can be scary. After all, while working for yourself is usually incredibly fulfilling, a lack of income stability is very stressful. To remedy this, get the following financial items in order before you quit your day job.
1) Build up an adequate emergency fund. Self-employment income is rarely stable, at least at first. To make up for lean months, you should save up enough to cover at least a few months of expenses in an emergency fund.
The exact amount of savings will depend on your own circumstances and risk tolerance. Renters without dependents or existing medical conditions who make enough to cover barebone expenses each month will not have to save up as much as homeowners with three kids with completely unstable income.
At a minimum, I would save up enough to pay your bills for three lean income months in a row. This should give you enough of a cushion to get through any tight spots. If your life circumstances require more or you have a lower risk tolerance, save up until you are at a comfortable level.
2) Research low cost insurance options. One of the biggest deterrents of self-employment is the high cost of health insurance. Before quitting your day job, research all of your options to make sure you are getting insurance that both meets your needs and is affordable.
One thing you shouldn’t do is forgo purchasing insurance. Life happens, and the cost of insurance will pale in comparison to an uninsured hospital stay.
3) Open separate business accounts. Don’t mix business with pleasure! You need to separate your business accounts from your personal accounts immediately. At a minimum, you’ll want one business checking account and one business savings account.
In the savings account, it is important to put aside money for quarterly tax payments. As an entrepreneur, you are now in charge of paying your own taxes. If you don’t, you will be penalized by the IRS and your state tax department.
It is also not a bad idea to open a business credit card. Whatever you do, don’t use your personal accounts or credit cards for business expenses. It will make your life a lot more difficult when trying to determine business income and expenses for tax purposes.
Don’t let financial stress keep you from pursuing your dreams of entrepreneurship. By saving up money to cover lean income months, opening separate business accounts, and finding the best health insurance option for your budget, you’ll be free to focus on what you really care about — your business!