3 Tips to Financially Prepare for Entrepreneurship

  • AUTHOR: Joseph Anthony
  • DATE: 04/26/2006

If anxiety about losing your steady paycheck and benefits is keeping you from starting up your dream business, then believe me, you’re not alone. You may worry that you have too much debt to become an entrepreneur.  These are valid fears which need to be addressed before you quit your day job.  Here are three things you can do to financially prepare for entrepreneurship while still in your corporate job.

Pay down debt

Lynnette Khalfani, author of the New York Times bestseller “Zero Debt: The Ultimate Guide to Financial Freedom,” stresses cleaning up your finances in preparation for entrepreneurship.  Of primary concern is a large load of debt, which will make it difficult to get through the first lean months of your startup, and challenging to get the cash you need to fund your business.  Khalfani’s tips for paying down debt:

  • Call creditors and negotiate a lower interest rate: “Most people don’t realize they have leverage in negotiations with creditors.  There are 5 billion credit card offers sent each year.  The environment is incredibly competitive and you should use this to your advantage.” 
  • Don’t close those $0 balance accounts: Closing out paid-off accounts may actually hurt your credit score more than helping it, so think twice before you cut up those cards.  Instead, Khalfani says, “Learn to control your impulses and better manage your credit and debt.”
  • Use windfalls properly: A windfall could be a year-end bonus, tax refund, insurance settlement or inheritance.  Use windfalls to pay down high-interest debt, not purchase luxury items you can live without.

Build a cash cushion

Hopefully you’ll never need it, but Khalfani says an aspiring entrepreneur should have a 6-month cushion of living expenses to deal with “disasters of any kind, which could include a lawsuit, client who doesn’t pay, or a partner who runs off with your money.”  Set up a savings account in a hands-off location, such as a small bank far from your house with limited ATMs.  Make it difficult to access. 

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On the other side of the cash cushion equation is cutting back on unnecessary expenses (do you really need the cable TV package with every premium channel?!), or getting a second job.  And get rid of stuff you don’t need by donating it to a local charity.  Khalfani says, “There is a great tool called ItsDeductible that will give the IRS-approved value of your things.  You often get much more in tax deductions than you receive selling the item at your own garage sale.”

Purchase some key benefits while you are still employed

The benefits available through your employer are almost always better and less expensive than benefits available to individuals or small businesses, but there are some ways you can leverage those benefits to your advantage.  Before you strike out on your own, explore these possibilities:

  • Check if any of your current benefits are portable:  Maybe working for “the man” has provided you a nice benefits package.  You might even have a couple of benefits that are “portable,” meaning you can take them with you when you leave and assume the premium payments yourself.  The advantage is that you maintain the good coverage and cheaper group rates you wouldn’t have access to as a brand-new entrepreneur.  Portable benefits include health savings accounts (HSAs), and can sometimes include disability insurance and life insurance.  Check your policies to find out whether you can take them with you.  But don’t get “porting” them confused with “converting” them.  Converting means that you are guaranteed the coverage you had with your employer, but you are subject to higher rates, so read the fine print.
  • Purchase disability insurance:  It can be difficult to get disability insurance on your own since, statistically speaking, you are more likely to become disabled than to die.  Khalfani advises, “It’s much better to apply for this insurance while you are still employed since insurers ask to see two years’ worth of income from your business.  If you apply after you leave your job, disability insurance is costlier and more difficult to obtain.”  Of course, if you already have disability insurance through your employer, you should check first if it is portable.  If it’s not, you can buy an additional policy on your own for your new business venture.
  • Make contributions to a Health Savings Account (HSA):  “Health premiums are on the rise and workers have to shoulder the costs.  If you put money in your health savings account, it has tax advantages.” Even better, it’s not a “use or lose” item, so you can take it with you.  Some employers even match employee contributions to HSAs, and while you won’t be able to make any additional contributions to that particular HSA once you’re on your own (though you can certainly start another one), you will at least have some funds to cover health care costs for your first year or so of business, which can be a huge help.

 

If you take the time to address these issues while you are still in your corporate job, you will greatly increase your chances of success as an entrepreneur.  Then you can stay focused on the fun part — starting your business!

Pamela Slim is a StartupNation guest expert and an entrepreneur coach who helps people in corporate jobs break out and start their own businesses through her Escape From Cubicle Nation blog.

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