This post is in partnership with Lexington Law, thank you for supporting brands who support TCM. As always, all thoughts, opinions, experience, and advice is my own.
Ahh entrepreneurship… it's the dream for many. But it comes with a lot of unexpected and unforeseen bumps in the road. When E and I first started dating he recently launched his first company and went without a salary for a few years. Meanwhile I worked and was in school until deciding to start my own business too. Eventually he sold his company and went to work for a traditional employer. But at any given point these last six+ years, one or both of us has been self-employed. And as of last month, we are both back to being entrepreneurs (oh and with a baby on the way in case you missed that!).
To say we've learned a thing or two about preparing our personal finances and household budget when becoming or working as entrepreneurs is an understatement. I know SO many of you have dreams of working for yourself full time and I want to help you make that dream a reality.
So today I'm sharing a few tips to make the transition to becoming an entrepreneur as easy as possible by preparing your household budget!
Stack your emergency fund and savings account.
Your emergency fund and/or savings account NEED to have at least 6 months (ideally 9 months to a year not that you're self-employed) of living expenses! Typically I tell people to keep their emergency fund and savings accounts separate. Buttt I think you get a *little* wiggle room here if you're going down to one income versus not bringing in any income. Personally, I had a years worth of living expenses in an emergency fund and only kept a little money in my savings account (and ultimately just lumped it all together) which is why I say it can be either/or for this situation.
Now I do NOT recommend draining your emergency fund, but I do believe it's okay to pull from it for a while. After all, as a general rule of thumb people have six months of income in their emergency fund to support them if they can't work unexpectedly for that period of time. I wouldn't recommend ever letting it go below 3-6 months of living expenses though; if it does, get a side hustle. Personally, I looked at my emergency fund and determined that I felt comfortable pulling 3-4 months of living expenses from it before I'd go back to waitressing on the side.
Prepare for health insurance
Health insurance is *different* when you're an entrepreneur. You likely need to get insurance through the marketplace which has limited plans that aren't accepted by most providers. If you have medications or special doctors you need to see, look into whether or not you'll get them covered before signing up for a plan. In some cases you may be better off paying the high Cobra premiums with your previous employer.
Keep costs consistent
If you haven't already created a budget – now is the time!! Lexington Law suggests these apps for budgeting. And if you do have a budget, this is a great time to revisit it and cut out any unnecessary spending! Try to eliminate any and all variable costs and really keep things predictable. This will allow you to plan better for the future.
Pay yourself first when money does come in
Once money is coming in, it can be tempting to reinvest it in the company – or you may feel nervous about taking it out at all. Resist both those urges and make sure you start consistently paying yourself *something* each month. I really struggled with this my first year as an entrepreneur. I didn't know how much I'd need for end of year taxes or business upgrades so I barely paid myself. It wasn't until my third year of self-employment that I finally I set up a recurring withdrawal to pay myself a small monthly salary and then just take larger chunks out at the end of the year or as needed.
Prepare for life changes
Self employment affects your credit and finances in a lot of ways, which you can read about here. When you're an entrepreneur you have to be even more prepared to tackle life changes! For instance, E and I have had difficulty getting leases because we've both been self employed and in turn, had to show a years worth of rent in liquid accounts before they would agree to lease to us. Similarly, qualifying for a mortgage can also be more difficult. Both of these are also great reasons to pay yourself consistently each month! Still, you'll want to plan ahead and do your research before jumping into any big milestones with regard to what you'll actually need in the bank now that you're self employed.
Minimize as much personal debt as possible BEFORE starting
(Ideally all of it // with leniency for student loans and a mortgage of course)
You'll want to eliminate all “bad debt” before starting your business. A general rule of thumb in entrepreneurship is if you expect it to take you X months before you start making money, double it. In other words, if you're planning on six months until you see a penny, prepare for a year without making money.
You don't need the extra stress or pressure of paying off a credit card bill each month. Plus debt impacts your monthly bills in ways you probably haven't even thought about (read them here!). On the other hand, student loans and a mortgage are considered “good debt” so you can leave these as fixed costs in your budget, but ideally you'd be able to pay off your student loan in advance as well.
Diversify your income
A smart entrepreneur always has more than one income stream! Now that's not to say start off doing all the things with your business – that's a surefire way to fail – but it is to good to get creative with your income streams. For E and I, we've both don't consulting on the side with other businesses and even our past employers! I've done freelance writing, built websites for people and done graphic design work even though those are services I would never offer because I don't enjoy them. I've also picked up counseling clients over the years when referrals came in. Basically be open to other money making opportunities that aren't necessarily in your business plan.
Within your business, you'll want to have a couple of ways you'll monetize so you're less likely to go through a dry spell. For me, that's sponsored content, blog consulting, speaking engagement / spokesperson opportunities, podcasting, selling the rights to my work, and consulting as a millennial expert for companies looking to target our generation with their own content campaigns.
Plan for retirement!
Just because you don't have a 401k anymore doesn't mean you can't plan for retirement! If you don't have an IRA you need to open one! Now more than ever, your retirement is really in your hands. Small monthly deposits make all the differences thanks to compounding interest. So the sooner you can start the better. If you're still feeling overwhelmed about your retirement options, Lexington Law wrote this post, “Retirement 101: Where To Begin” to help you get started and see your options!
Separate your personal and business finances!
This is the biggest mistake I see with my clients!! Do NOT, I repeat, do NOT run your business through your personal accounts!
Listen, I get it – before you make any money it's one thing. You may want to delay registering your business and doing all of that until you've made your first few hundred dollars. In fact, I'm okay if you wait until then. Just make sure you're set up with an accounting software and saving ALL your receipts so that you can reimburse yourself and write off your expenses when you do start making money.
As soon as you make your first few hundred dollars you need to get an EIN, register your business, and get a business bank account (and credit card if you want a credit card). From that point forward business runs through your business accounts and personal stays personal!
I know I've thrown a lot at you just now! And there's probably a ton I forgot TBH. Which is why I strongly recommend asking for help when you need it. Especially if you're paying off debt and trying to improve your credit score. Lexington Law offers a FREE credit report summary & consultation, click here.
Remember, preparing your household budget when transitioning to becoming an entrepreneur is totally doable. You can succeed without a ton of stress or taking out tons of debt. The key is to think about the long-term with the ultimate goal being stability through the next year or so. If you're looking for more tips check out Lexington Law's article on improving credit in a single-income household here!
Battle of the cards: Credit vs Debit vs Prepaid vs Secured [Which Is Right For You!]
How To *Actually* Budget Using The 50/20/30 Guideline
How To Repay Debt [2 Strategies To Change The Game]
Millennials, This Is How To Start Repairing Your Credit