You’re financially savvy enough to know that you need to prepare for the transition. You want to make sure that you’ve dotted your i’s, and crossed your t’s before making the jump.
Raise your hand if any of the above apply to you.
You’re not alone — in fact I was in the same position a few short months ago.
After my wedding in July, I quit my full-time job for a seven month contract.
The contract was a stepping stone to self-employment and gave me a deadline to work with — a chance to prepare myself, essentially. I was excited to work toward this huge step, but also knew it would take a lot of preparation to launch a successful career as an entrepreneur.
Here are the six steps that I went through to prepare myself financially.
Create a Quit Budget
Every to-be entrepreneur needs a “quit” budget.
Your quit budget will not look the same as your current budget. For instance:
- If you will be working from home, most of your commuting costs will be cut from your budget
- If you pay into a social fund at the office, that will be removed
- You’ll no longer be paying for work clothing or union dues
- You may need faster internet or new equipment
- You may need to pay for health insurance if you had it with your employer.
In my case, I would be working from home, so I would save $200/month on gas and car maintenance. My business is based around a community I’m building to help people pursue business ideas, so my business costs would increase as I paid for Aweber, domain names and themes.
Start Making Money on The Side
Entrepreneurship carries some big risks. If you’ve never tested your business idea, it’s hard to know whether it will work — of if you’ll be able to make a sustainable income from it.
One of the best ways to mitigate this risk is to start side-hustling before you quit.
This will give you enough time to test out some income methods, and allow you to save the extra money that you make for your quit fund. As your business grows you can always drop side projects.
Build a Quit Fund
Self-employment isn’t easy, and it will take some time to get a business off the ground.
That’s where the quit fund comes in.
You should save up 3-4 months of income in a savings account for the purpose of covering yourself while you get on your feet and start replacing your regular income.
The quit fund should be in addition to your emergency fund.
Why have both? It’s simple:
Emergencies don’t hold off because you’ve quit your job to pursue self-employment. Can you imagine the financial impact of an emergency striking while you are trying to build a business and don’t have a steady income?
Cover yourself with both types of savings accounts.
Build a Backup Plan
When it comes to your finances, it’s important to be realistic.
Sometimes, your best laid plans are unsuccessful and you have to revisit the drawing board.
It’s far better to create a backup plan now, rather than waiting until you’re desperate.
- Plans made out of desperation leave you grasping at straws that you may not be happy with in the long run. For example, if your product launch fails and you need income now, you might resort to doing something you don’t love to do to pay the bills.
- Having a backup plan in place will clear your mind and help you focus on the job ahead of you: building your income in self-employment. Lacking a backup plan can weigh heavily on your mind, even if you don’t know it. It can make you feel insecure and draw your focus away from what is important in the moment.
Set Yourself Up for Success
You’ve already picked up a couple of side hustles to pad your income. You’re starting to save for your “quit fund”, and you’ve developed a realistic budget. You’re feeling organized.
Now, it’s time to set yourself up for success by starting your business before you quit.
Are you going to be able to do everything that you want while still at your day job? No, but you can develop your website, start pitching clients, research which type of product or service you’d like to offer, and more. Take care of the administrative tasks now, so you won’t need to focus on them as much in the first weeks or months of self-employment.
If you’re anything like me, you want to ensure that you give self-employment your best shot. With careful planning and hard work, you’ll be able to ensure the right amount of financial preparation.