How to Afford to Work for Yourself: Tips for Your First 12 Months

Through research and through experience working with young aspiring entrepreneurs and small business owners, I constantly find that the one of the biggest barriers to entry for starting a business is often the financial aspect, whether it’s how to save/get the money to start up, determining how much you need to do so, or what to expect when it comes to properly managing and planning it.

While more and more resources, programs and potential fundraising options are opening up to encourage the rise of small businesses, it’s still difficult to access the type of funding needed for many of us to comfortably get through the 12-36 months startup cycle that most businesses face before reaching a point of sustainability. And unless you’re the next tech giant to-be with a goal of growing into uber-scalability, don’t expect VCs or outside investors to look in your direction.

Who needs ’em anyway? Because for many of us whose goals are simply to create a sustainable business that resonates with who we are on a personal, professional and creative level, it’s not about growth so much as it’s about finding a way to manage ourselves and our business venture financially during the career transition leap from employee to entrepreneur. So what are some strategies for managing your money as an entrepreneurial newbie, and financing your first year as a new business?

Understand Your Entrepreneurial Objectives
Think about the vision you have for your business and the goals associated with it. Is your goal to transition into your business full time in the next 12-18 months, and grow it into your primary income source? Or is your business more of “side gig” or freelance venture, meant to serve as an additional income source, perhaps to save for something else or maybe increase your earning potential alongside whatever else you’re doing as a primary career? Those are two very different intentions.

With that career goal in mind, set a goal for how much money you need to save to comfortably transition into that next phase of your business, and determine a timeline for when you plan to have that sitting in the bank. Saving for 12 months of expenses may not be a reality for many young urban-dwellers with high costs of living. So perhaps your goal is to save enough to solidly get through the first 3 months, and have another income source securely in place to supplement that, be it a part-time job, consulting or freelance work. Whatever you goal is, know that figure inside and out, and have a solid game plan around how you plan to reach it. How do you determine what that figure is or should be based on?

Create An Annual Salary Figure For Yourself
While you might not be receiving a regular paycheck the same way you would working full time for someone else, as an entrepreneur it’s still critical to know what that earning figure is that you need to attain to be able to get by. The same way that you would negotiate a salary package based upon what you know you need to satisfy your basic cost of living, you need to factor in all of your appropriate expenses to know what kind of income you need to generate. And many people start their business as a side gig, working a part time or full time job to save up a cushion, or have an income source while their business is getting off the ground. However you generate your income while you’re growing your business in the beginning, know what that total figure is for the first 12 months, based on 1) your monthly personal expenses, 2) your estimated monthly business-related expenses, and 3) your estimated upfront/one-time startup costs.

Personal Monthly Expenses: $3000
Business Monthly Expenses: $500
Total Monthly Expenses: $3500 / $42,000 Annually
One Time Start-Up Costs: $1200
Minimum “Salary” To Get Through the First 12 Months: $43,200

Do yourself a favor and don’t shoot for the minimum either. This is your minimum estimated salary figure, and it doesn’t necessarily take into account unforeseen expenses, or even opportunities that might come up. Don’t forget about income taxes either; when you work for yourself or as an independent contractor, you may be subject to pay additional “self-employment tax”, meaning that you have to pay additional taxes to cover Medicare and Social Security, which are normally paid for by your employer or deducted automatically from your paycheck when you work for someone else. A good rule of thumb as an independent is to stash away 30% of your earnings for taxes. At the end of the day, challenges and also opportunities will present themselves, and keeping that in the back of your mind as you plan your budget will position you well to be able to handle them just fine as they arise. Plus, everyone needs a little vacation now & then!

When it Comes to Finances, Make it Business… Not Personal
Open a separate bank account for your business, and perhaps a credit card in the business name. This will help you establish credit for the business, and also keep track of business-related expenses that you plan to deduct at tax time. Keeping records of these expenses is incredibly important, and can save you a lot of money in the long run! In addition, having a bank account in the business name will allow you to manage payments from clients, pay vendors who work with you, and track that income accordingly. Most banks will not allow you to deposit or cash a check made out to the company name into your own personal account. At least not without a fight…

Know Your Tipping Point
It can be a smart idea to start up your business on the side while you’re still working full time or part time in another job or career. It gives you time to save up money toward your goal, so that you’re not starting your business from a place of desperation, and sacrificing the quality of your work simply to pay the bills. One thing you will want to do in this situation is know exactly how much time you have each week to devote to your side business, and be able to commit to that. If you are working for someone else from 9am to 5pm, what hours can you guarantee that you’ll be available to speak with prospects and customers? If you get a new project or assignment, how quickly will you be able to turn it around? If a client needs to include you in a meeting at 10am, will you be able to be available?

It’s a bit of a juggling act at first, and every side entrepreneur experiences this challenge. But do keep in mind that you will eventually reach a point where the business can’t possibly grow any more because you can’t accommodate any additional workload without dedicating more time and effort. And perhaps that will be the pivotal moment when you consider whether or not you want to make the leap to being a full time entrepreneur. Have an idea of what your options will be when you reach that point, and start putting together an exit strategy if you plan to make that eventual transition out.

Money shouldn’t be scary, and it doesn’t have to be intimidating either! A successful business requires a solid financial foundation right from the start. You don’t have to be making tons of money to train yourself how to manage your money effectively. A little knowledge, creative strategy and effective planning is all you need to determine what you need to finance your first year in business, where that revenue will come from, and how you will manage that revenue once it comes in. The good business practices that you establish early on will go a long way in creating success and abundance for the future!

PS – Need a good, no-BS budgeting tool to get you started?  Check this out.

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