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Are
you thinking of striking out on your own
and joining the growing ranks of the
self-employed? It is an exciting
prospect and possibly a little scary.
But you can remove some of the fear by
doing whatever you can to prepare
yourself financially for life as an
entrepreneur.
What steps can you take?
Here are a few to consider:
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Save as much as you can. Ideally,
you would want to have a couple of
years' worth of living expenses
saved before you go solo. But that
is a pretty tall order for most
people. And if you have a spouse
earning a good income, you may have
less need to put away a large sum.
Nonetheless, it is almost always a
good idea to save as much as you
possibly can before becoming your
own boss.
-
Think twice before cashing out a
retirement plan. If you are leaving
a job that provided you with a
401(k), 403(b) or 457(b) plan, you
might be tempted to cash out your
account to help pay for the
transition to the world of
self-employment. However, try to
avoid this move. By liquidating your
employer-sponsored plan, you will
face early withdrawal penalties if
you are younger than 59-1/2, and
income taxes, too. Just as
importantly, you will be depleting a
valuable resource for your
retirement. If at all possible, try
to find other sources of income. For
example, you may want to consider a
home equity loan; interest rates on
these loans are usually competitive,
and your interest payments may be
tax deductible. Be aware, though,
that you will be using your house as
collateral, so make sure you can
afford the payments.
-
Consider opening a new retirement
plan. Once you make the jump to
self-employment, start thinking of
what type of retirement plan you
might want to choose. Fortunately,
you have some attractive options
that offer both tax advantages and a
wide range of investment choices. If
your business has no employees
except yourself and possibly your
spouse, you may be able to establish
a SEP-IRA or an Owner-Only 401(k).
If you will have employees, you
might want to consider a SIMPLE IRA
or a Safe Harbor 401(k). Your tax
adviser and investment professional
can help you choose an appropriate
plan.
-
Pay yourself a regular salary.
Depending on what type of business
you are opening, you may well
experience an uneven flow of income,
which could, at times, force you to
dip into your long-term investments
to help you meet your daily and
monthly expenses. To avoid this
potential problem, consider paying
yourself a regular salary out of
your business' earnings. It is
crucial that you live on a
pre-agreed amount, even if the only
person you have to agree with is
yourself. Too often, entrepreneurs
use up one month's paycheck and then
have nothing left in the next down
month. But if you have the
discipline to stay within the income
you have allotted yourself, and your
business succeeds, you should
eventually build up a cash cushion
that can be used for emergencies or
investments.
Your career as an
entrepreneur can be rewarding in many
ways, and you will enjoy it even more if
you make the right financial moves.
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