After working for myself for over two years, I’ve had plenty of time to reflect on both my successes and my failures. One big thing I wish I’d done differently? Preparing my finances for the cataclysmic shift from full-timer to freelancer before I ever left my 9-5 job.
Below are all the things you should do to financially prepare (no, really, it’s just good practice) and hopefully save yourself the headache and heartache that often comes with being in business for yourself.
Make a plan
So, I first went freelance because I was really frustrated at my then-job. I gave notice and quit the moment I was bringing in enough to cover my bills. I had no plan for my business or what I would do after I was finally on my own, which is why I now advocate that the best thing you can do to financially prepare for being your own boss is to have a plan in the first place.
Below are a few steps to get you started:
- Calculate up how much your living expenses are
- Identify areas where you need to cut back
- Come up with a number for how much you need to be making in order to cover the bills, your own insurance, and taxes
- Break down that number into how many clients, product sales, or freelance hours you’ll need to meet that number each month.
- Then, create a sales plan for how you’re going to reach that number (if you’re not there yet. Don’t quit your job unless you are!)
See? Having answers to these questions will help you know the numbers behind your business, and provide a baseline for the bare minimum amount of money you need to “break even” each month.
Fully Fund Your Emergency Savings
Many entrepreneurs start businesses while working a day job. This is a good way to both hone your skills with the comfort and safety of a paycheck, but also store away enough cash so you can leave your full-time job. The first year in business is always rough, so having a cushion to fall back on, and earnings to give your business enough time to get off the ground, is a very important thing.
You should also have 6-9 months of living expenses saved. Just take the amount of your living expenses and multiply by your desired number of months. Typically, those without mortgages and families can get by with putting away less for taking the plunge, since they have fewer financial responsibilities, but the more you can save - the better.
Get all of the paperwork in order
If going into business for yourself, it’s best to create an organization (such as an LLC) to legitimize your business. This will allow you to open up a business checking account, so you can keep your personal money separate from money for the business.
You’ll also need to get a sales license if you’re selling product, or potentially buy additional insurance if you’re going to be meeting clients or team members at your residence.
Have an emergency fund...for you and your business
Admittedly, this was something I struggled to get the “hang of” while in business for myself. Above I mentioned having an “emergency fund” set aside for yourself for when you leave your job.
You’ll also need some type of savings account for your business.
I know, I know, it feels like you need to save a million dollars before you can go out and tackle your dreams...but you’ll need to have a separate savings account for the business to set aside quarterly tax payments, and squirrel away money for any bigger ticket purchases for your business.
You’ll want to keep investing in yourself and your skillset, whether it’s learning how to sell online, taking a coding course, or a night class on basic business accounting, and it takes savings to make investments like this happen.
Trust me, when you are the boss, having “the money” under control frees up bandwidth for other parts of your business like client service or managing contractors and employees -- just do it!