For years, I sat behind a desk crunching numbers, analyzing spending trends, validating financial transactions and generating reports. (Sound exciting?) Although the day-to-day routine bored me out of my mind, I did what most logical people would do and sucked it up. After all, the money was good and I worked with a decent group of people, so it definitely wasn’t the appropriate time to rock the boat.
I’d always had a knack for writing, but had chosen not to pursue it because of horror stories about cheapskate clients or working long hours just to make ends meet; accounting definitely seemed like a more lucrative career option. And besides, I’d bent over backwards in the years prior digging myself out of the trenches of debt and getting back on track financially. I finally had a stable and well-paying job, a decent home, nice cars to drive, and a little money in the bank to take a few family vacations each year.
Not too shabby, huh? Well, except for the fact that I was dying inside. Long story short, a series of unplanned events unraveled and I was practically forced to pursue my dreams as a freelance writer and business consultant. And it was the best decision I’ve ever made.
Turns out, the income potential is sky-high if you have the talent and the hours aren’t so bad. In fact, I’m able to spend more time with my little ones and adjust my work schedule to meet their needs and wants on occasion.
Luckily, I had gotten my feet wet just to get a taste of what my life as a mommy-preneur would be like, but there were a number of other significant financial matters I overlooked. And while I survived the sleepless nights and financial headaches, I could have avoided those oversights if I’d been properly prepared beforehand.
So in an effort to prevent you from making the same mistakes I did when transitioning from the workplace to mommy-preneurship, here are some wise money moves to consider before you make the leap.
1. Have the Money Talk
If there are others who will be affected financially by your decision to walk away from a steady paycheck, it’s imperative to have the money talk before moving forward.
Of course, you don’t need to sit the children down at the dinner table and detail your plans. But keep your significant other in the loop in case they need to make adjustments on their end. This will probably be the case unless your business is already a money-making machine with no sign of slowing down. Otherwise, you need to discuss budgeting, saving, outstanding debts, benefits, insurance, retirement planning, and any other financial matters that will be impacted.
2. Crunch the Numbers
Once each of those topics is addressed, you’ll need to honestly assess your current financial situation to see whether you’re realistically in a position to make the leap. Money will be tight at the start for almost any entrepreneur, but if you’re barely making ends meet in a two-income household, your credit card debt is through the roof, and your business has few if any clients, the timing may not be right.
Listen, I completely understand your desire to ditch the rat race for the opportunity to build the company of your dreams and spend more time with your children. But timing is everything, and an honest appraisal of your finances now can save you from unnecessary stress and headaches down the road. So do yourself a favor and crunch the numbers.
You’ll need to compute your monthly expenses, both fixed and variable, outstanding debt obligations, and savings account balances. This will give you a pretty good idea of where you stand financially and any areas that need improvement before you leave the safety of your current job.
3. Build Your Cushion
If you don’t remember anything else from this post after reading it, please make a mental note to build your cushion. Whether they’re seasoned business owners or new to entrepreneurship, most mommy-preneurs will agree that having funds to fall back on when those rainy days roll around is important. So, saving shouldn’t be taken lightly.
Financial experts offer varying recommendations for how much you should actually put away. Some suggest 3-6 months’ worth of expenses, while the more conservative set says a 12-month cushion is a more suitable rainy day fund.
My advice: Save as much as you can, and don’t ever stop. In other words, calculate how much you’ll need to survive a rough patch, which could last anywhere from a few months to a year, hit that target — and keep saving. I’ve been a mommy-preneur for quite some time, and I still abide by this golden rule.
4. Fill the Benefits Gap
Another reason to save: Going solo means saying goodbye to paid time off, sick time, and vacation days. Instead, you’ll have to stow away enough money to get through those periods on your own.
Now is also the time to review any medical, dental, and disability coverage you currently carry through your employer. Are your kids also covered through your current health care plan? In case you’ve yet to do any research on private coverage options, let me be the first to warn you that employer-sponsored plans — what you’ve probably been paying into — typically offer much lower premiums than what’s offered on the market. (If you enroll through Obamacare, you may be able to find lower rates, depending on your income and state of residence).
It’s best to do some research and weigh your options; often your best bet may be to sign onto your spouse’s work plan, if that’s a possibility. You shouldn’t have to wait until your spouse’s open enrollment period — leaving a job typically constitutes a “major life event,” such as marriage or the birth of a child, so your spouse’s HR representative should be able to add you and any dependents onto his or her plan.
5. Set Goals and Projections
There are no guarantees that things will go as planned when you launch your new business, but it’s always a smart idea to project revenues and expenditures. This will help you with prioritizing tasks and creating short-term, mid-range, and long-term goals.
It’s not necessarily a bad idea to use inflated figures for your vision board, but the numbers you’ll be plugging into your spending plan should reflect the worst-case scenario. You’ll prepare yourself for rough patches and have plenty of extra income to fall back on as your business grows.
Also, be sure to account for miscellaneous expenses, such as business formation and licensing, bookkeeping services, and website development, just to name a few.
This approach worked well for me, and I immediately deposited any excessive funds I earned from my hard work. Even better, we quickly adjusted to spending less on unnecessary “things” and having a larger cushion to spend more time doing what we love most: traveling.
6. Revisit Plans for Spending and Debt Management
Now that you have a pretty good idea of how much cash you’ll be forking over each month for expenses, it’s time to go back to the drawing board. Your new spending plan will need to encompass saving and debt-management goals. It should also reflect any spending cuts you’ve made to reach your business goals.
Before I left my job, to get into the swing of things, we lived off of one income and saved the remainder until I completely cut the cord. It was tough, but worthwhile once we noticed how quickly our savings account was growing. And it helped us embrace frugal habits — to this day, we still live well below our means.
Another note: The more credit card debt you can pay off, the better. The minimum-payment trap has the potential to keep you in debt for many years to come, since a bulk of what you pay each month is more than likely only covering accrued interest. But if you aggressively pay down those balances, you can omit them from your budget and have more room for other expenses down the road.
7. Life Insurance
Without sounding too morbid, I’ll attempt to discuss the importance of life insurance. But first, I’d like you to ponder a few questions:
- If you pass away, will your business be able to run smoothly or will it be devastated financially?
- Can your family survive without your income?
- Are you planning to run a one-man show?
Your responses to these questions will help you get an idea of how much life insurance you’ll need (but I definitely suggest speaking with a licensed professional to better assess your situation). You may be able to keep the life insurance plan you have through your employer. Otherwise, you can shop for a new policy on your own, or look into discounted group life insurance through organizations such as your alma mater.
And if you plan on beefing up your existing policies through your employer, ask your human resources representative whether the rate increases once you leave. It could become much higher than you initially anticipated. Just don’t move ahead without an appropriate amount of coverage, or you could leave your significant other in dire financial straits in the unfortunate event you pass away.
Planning to cash out your retirement fund and invest the cash in your business? Be prepared for the tax consequences and early-withdrawal penalties you’ll incur. A smarter approach is to discuss rollover options with your financial adviser.
Also, communicate your intentions to transition into the wonderful world of self-employment and inquire about any options that may better suit your needs once you take the leap. And to derive the greatest benefit from compounding interest, get started as soon as possible. We don’t know what the future holds, so don’t bank on a large capital infusion to fill the void.
9. Test the Waters
I know you’re anxious to put your plan into motion, so here’s your chance to give it a shot — under one condition: Remain at your full-time job and find time in your busy schedule to test the waters of your new venture.
While I was still employed, I’d work early in the morning, on lunch breaks, and at night to complete client assignments. Now, let me warn you that it took a lot of guts and determination to make this work. But the outcome was far greater than I expected, building both my business and my confidence, and I grasped an even better idea of when I’d be ready to turn in my resignation letter.
10. Reassess Income and Expenditures
Perhaps your trial run turned out much better or worse than you initially projected. Regardless of the outcome, it’s time to reassess your business goals, income, projections, and spending plans in order to make adjustments. You’ll definitely need to account for the fact that once you transition, more doors of opportunity are likely to open because there will be more time available to focus on brand development and client acquisition activities.
And remember, it’s unlikely that all of your hours will be billable, so your hourly rate will have to be higher to make up for the time spent on invoicing, scheduling, and research and development.
11. What About Child Care?
To every mother who thought she could successfully spend a day glued to a computer without an interruption from her little one(s), think again! In fact, I recently wrote an entire post on how to keep your kids busy on those workdays you’ll be spending together.
For some strange reason, I initially thought I could run a business from the comforts of my home with a clingy toddler in tow. Boy, was I sadly mistaken! Because writing definitely requires my undivided attention for several hours at a time, the constant nudges and ruckus in the play area, which were clearly attempts at getting my attention, became problematic early on.
My suggestion: Start thinking about child care arrangements now! Full-time rates may be too pricey, at least early on, so inquire about discounts or part-time coverage. Depending on the type of work you’ll be doing and whether you can squeeze in some extra hours at night, you might find that just a couple of child-free days a week are enough to keep you from falling behind.
12. Go for It
Let me be the first to congratulate you on all the effort you’ve expended to get your finances in order. To recap, you’ve:
- Had the money talk with your partner to put everything on the table.
- Crunched the numbers to see where you stand financially.
- Made some (grueling) sacrifices to build your cushion for a rainy day. And trust me, life will definitely happen when you least expect it. So it’s better to be over prepared than caught off guard.
- Determined which coverage options best suit your medical, dental, and disability insurance needs.
- Revisited the drawing board to make adjustments to your current spending and debt-management plan to reflect your future income.
- Compiled a list of business goals and financial projections. Your visions may have been grand, but the numbers used in the reports were based on the worst-case scenario.
- Connected with your benefits representative from human resources to inquire about taking your life insurance policy with you. And if necessary, reached out to other providers to fill the coverage voids that will exist once you depart.
- Spoke with a financial adviser and decided how you will continue to fund your retirement accounts or if you need to set up new ones.
- Tested the waters to get a taste of how your finances (and life) will be different as an entrepreneur.
- Made the final adjustments to your spending plan and financial projections to reflect your results.
And now it’s time to take the leap. Even though you may be many miles or continents away, I’m excited that you’ve made the decision to pursue your entrepreneurial dreams in the most responsible way possible, and I wish you much luck on your future endeavors. The road may get rugged, but at least you’ll have that financial cushion to to keep you afloat while you regroup.