09 - Tip Tuesday with Andrea Travillian - Five Financial Steps To Take To Get Ready for Self Employment

Nothing is scarier than saying good-bye to that steady paycheck and going out 100% on your own.  Andrea Travillian of Take A Smart Step is giving us five steps that we can make to get ourselves more prepared to make that plunge.

1. Learn To Live on Much Less Than You Make.  There are no general guidelines, but it’s really about understanding your goals, and the dollar amount it’s going to take to get to those goals.  Then it’s just about filling in that gap.

Instead of trying to set specific rules, it’s best just to try to work backwards into your numbers.  Find the gap between what you’re currently bringing in from your business to where you need to be to match your current income.  Set six months of that gap aside, and then the longer you can get that gap to work for you, the better.

2. Have An Emergency Fund.  Have one for your personal fund, and also have one for your business.   Six months is the minimum you want to have, and of course, this all depends on your circumstances.   If you’re married, and your spouse is still working, and your business has been running on the side, you may need less.  However, if you’re single, and just starting a business, you may want more.

Andrea’s general rule is to think about what you’ll need to be profitable, and just double it.  So if you think you’ll have money in 6 months, then set aside money for a year.  Just remember the more money you have in the bank, the longer you have to make your business work.  You can build yourself more time before you have to throw the towel into the business.

Should you plan on paying yourself a salary from your business right away?  Although both arguments can be made, it’s usually a good idea to try to get a salary in your plan for your business right away.  This not only helps to put money in your pocket, but it sets your business up to be more desirable should you want to sell it.

3. Pay Off As Much Debt As Possible.  The more debt you have, the more income you need to pay off that debt.  The more revenues you will have to create, the more debt you have. 

Are there any debts that are better than others?   It’s usually not good to categorize bad or good debt.  Debt is debt.  However, as you’re paying off debt, your higher interest rates, and biggest payments.  Also more dangerous debts like pay-day loans, etc, that will end up costing you too much to keep around.         

4. Have the Right Insurance in Place.  This doesn’t mean home and car because that’s obvious.  However, you also need to consider life, health, and disability. 

Life Insurance:  There are two types: term life and whole life.  In 99.99% of the cases out there, term insurance is a better option.  It’s mainly because you want things simple, and don’t want a ton of overlapping stuff.  Experts usually have an emphasis on one area.  If you’re combining the two, you might not be getting a better result.  Plus Term Life Insurance is just a cheaper option.

Health: First if you’re in an industry that has an association, a lot of those associations will offer group policies.  Many times they assemble those policies much like a corporation would.  So if you're in an association, make that the first option you look into.

Navigating the health insurance choices can be overwhelming. There are some things to think about like are you the only one insured versus insuring a whole family.  If you’re healthy and low risk, higher deductible/lower premium will be the better choice.  If you have children, who tend to get sick more or injured, you may want to go the higher premium/lower deductible route. 

If you’re young and don’t have a lot of health issues, Andrea recommends looking into an HSA where you can add tax-deductible money to a savings account that you can use for the rest of your life towards health care costs.

Disability –  The statistics are that you’re more likely to become disabled than die up to a certain age.  Disability also plays into paying yourself a salary because, after six months, they can pay you a percentage of that.  You will want to find an own occupation policy that kicks in within a certain amount of time.  As soon as you’re at a point where you’re making a salary and relying on that salary to live, you really should talk to an agent about picking up that policy.

5. Set-up A Retirement Plan and Follow It.  Put as much money away as you can.  Get a nice base started, and then let it compound and do its work.  Then once you’re self-employed, you need to realize you should continue to put more money away.

The first option is to fund your IRA.  That’s a nice easy one to start.  After that, small business has quite a few different options.  They just depend on income and how many employees, but there is something called the solo 401k.  There are SEPS and SIMPLES, which are more retirement plan options for small businesses.  Depending on where you are in profitability will determine which ones you will pick.  Your CPA will be able to tell you which one is the best option. 

How much should you stash away?  Andrea’s advice is 15% as a minimum.  Some are even starting to estimate 23%. 

If you are leaving a corporate job, should you get your money out of a 401k or can you let it sit?  Ultimately you want to get your sitting 401k out there, just so you have a lot more options for your investments.  It doesn’t have to be the first thing on your list.

Here’s a general checklist to get yourself ready for self-employment:

1.Understand your risk tolerance
2.Look at your ability to increase your revenues with more time to   commit to the business
3.How quickly can you get to your current salary level
4.Explore part-time options, if you need to.  Would part-time help you increase your hours on your business, which will increase your money coming in?
5.Have a plan so you know you’re on target and can help with communication.
More About Andrea:  Andrea Travillian is a financial coach with a focus on helping you achieve financial independence that is in line with your life and goals.

She has a degree in finance from the University of Iowa and an MBA from Creighton University.

She has worked in banking, corporate finance, taxes, and retirement investing both in the United States and abroad in Australia. Since 2007 she has been working with individuals and micro businesses to help them understand and manage their money.

She is an author of four books, writes at about.com and speaks on topics ranging from basic money management to understanding your start-up business money.

You can follow her weekly blog and videos at Take A Smart Step.com

Books Available for Promoting: http://www.takeasmartstep.com/products